Aneta Markowska, Jefferies Chief Financial Economist, joins Yahoo Finance Live to discuss the outlook of the market with the new jobs report.

Video Transcript

AKIKO FUJITA: And we haven't even talked about the jobs report. That is, if there is a silver lining today, kind of the positive news on the day. We did get that report this morning, 678,000 jobs added in the month of February. The unemployment rate edged lower to 3.8%. Hourly wages, though, remained flat. Let's bring in our first guest for the hour. We've got Aneta Markowska. She's Jefferies chief financial economist. Aneta, walk me through your thoughts here. What stood out to you in the report we got out this morning?

ANETA MARKOWSKA: Well, of course, the big shocker was the wage number, but look, first, I mean, I think just to see that there is really no loss of momentum and employment data. I think that's very reassuring. You know, we've averaged about 550,000 jobs this year, which is right in line with last year's average. So, you know, for a lot of the concern about growth really slowing materially this year, certainly not seeing any evidence of that in the employment data. So that's very reassuring.

The wage number certainly was a curveball. And, you know, at face value, this really does look like a Goldilocks report, right, where you're getting a lot of jobs and potentially moderating wage inflation. The question is, should we be extrapolating from this wage number? Is this really some kind of a structural shift and departure from what we've seen last year? And I don't really think that we can conclude that.

You know, I am inclined to look through this number for a few reasons. One, if you look under the hood, there is a lot of dispersion in wage growth. The numbers were really all over the place. You had a 1% decline in financial services. You had big increases in other sectors. So there's no evidence of a broad-based slowdown in wages. Non-supervisory wages actually rose by 3/10, and they were up 6.7% on a year over year basis. So if anything, the weakness was skewed toward white collar workers. And people left sort of in the bottom half of the income distribution still have a lot of pricing power.

And then finally, even if you take the 5.1 wage inflation at face value, it's still consistent with the steepest Phillips curve that we've seen in three decades. So, you know, it's really just too early to conclude that, you know, that the Phillips curve is flattening or normalizing and, sort of, we're going back to normal.

BRIAN CHEUNG: Hey, it's Brian Cheung here. I mean, that's kind of a good economics 101 viewpoint of the jobs report. But from a kind of anecdotal standpoint, what we know is that we're heading into the warmer months of the year, and people are going to go out. There's going to be a lot of seasonal hiring and hopefully a lot more leisure travel, especially now that we're over the Omicron wave. So just off of that storyline there, what does this jobs report tell you about the strength that we should expect or could expect in the months to come?

ANETA MARKOWSKA: Look, there's obviously a lot of concern about real wages, right? Because we know that inflation is going to accelerate pretty significantly here in the next two months. We're probably on track to hit 8% inflation by March, just given what we've seen in energy and commodity markets. So in the very near term, consumers are certainly going to get squeezed.

The question for the second half is still wide open because I still think there are a lot of reasons for inflation to slow later this year. Even commodity curves are projecting that this is sort of short-lived spike that will be followed by price declines. And there are a lot of reasons to believe that wage inflation will actually continue to accelerate. Look, we're four months from basically exhausting all remaining labor market slack. And as I mentioned, we're still on a very steep Phillips curve.

And, you know, if I were at the Fed, I would actually worry that as energy prices and food prices spike in the coming months, that that will actually start to feed into wages and inflation expectations, and rather than turning into a stagflationary shock, which is what a lot of people are concerned about, that this could easily amplify the inflationary pressures that we've seen to date. So I think from the Fed standpoint, this just means that they have to keep normalizing. That's the number one priority right now.

AKIKO FUJITA: So let's talk a bit more about what the implications are for the Fed, Aneta, because we're looking at a jobs report, the last one before this next meeting. And it feels like there is-- not it feels like-- there is a new risk that has been injected into the thinking here, which is the Russian invasion of Ukraine certainly elevated concerns around inflation, with commodity prices spiking. How do you think the jobs picture we're seeing today factors into the decision-making come two weeks?

ANETA MARKOWSKA: You know, I really don't think it changes anything. The Fed basically told us that, again, their priority is just normalizing policy, getting away from neutral. If we were sitting at neutral rates today, I think it would be a very different conversation. And I think the Fed would have to be more attuned to the downside risks to growth emanating from this crisis. But we're sitting well, well below where rates should be.

And so the Fed-- that sort of changes everything. That's why the Fed really doesn't have the luxury of potentially helping to offset some of these financial shocks. And again, I think there is a risk that this doesn't actually turn into a sort of a disinflationary shock, which, if we were sitting here three years ago and energy went up 30%, 40%, this would absolutely have been a stagflationary shock, and the Fed would be talking about cutting rates.

But we're starting from a position of very high inflation, elevated inflation expectations, a very steep Phillips curve, and a very tight labor market. And that changes everything. And I think the Fed's concern has to continue to be for inflation. So they're unfortunately really not in a position to help support markets here, unless this really turns into a sort of a massive tail scenario.

BRIAN CHEUNG: So on that point, we're going to get another really important data point from the Consumer Price Index next week, which is going to be very interesting because that's during that blackout period leading up to their next meeting on March 16, which means this print will come out, and then we'll hear nothing from the Fed until they make their abrupt announcement on the Wednesday afterwards.

So the Federal Reserve Chair Jay Powell already told Congress, though, that he's expecting a 25 basis point increase, which is a bit unusual for a Fed chairman to say outright, especially with data points having not come out yet when he said that earlier this week. So are we all said and done? We can just pack up and go home. We already know exactly what's going to happen March 16?

ANETA MARKOWSKA: I think pretty much. And it was interesting that he was so forthcoming in terms of essentially pre-announcing the hike. And I think it really underscores the Fed does not want to be adding to the uncertainty. They recognize that there's tremendous uncertainty out there in the market. They can obviously help by cutting rates, but at the very least that they can do is to try not to contribute to that uncertainty.

And I think that was the reason he decided to go ahead and essentially pre-announce what they're going to do in March. He also told us that they're going to announce not the timing of balance sheet reduction, but that they are going to make a decision about the pace of [INAUDIBLE] subject to caps. So presumably, we'll get some idea, pretty good idea of what that pace is going to be once they start. So he's given us an unusual amount of information. And I think, you know, there's very few surprises left for this meeting.

AKIKO FUJITA: Famous last words, Aneta. We'll see if it does, in fact, play out that way. Aneta Markowska, Jefferies chief financial economist, good to have you on today.