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What's going on?
On Friday, American workers rejoiced as a jobs report showed the strongest growth in wages since 2009. Less rejoicing happened on the stock market, which interpreted the better-than-expected news as evidence that higher interest rates would follow soon.
What does this mean?
Rising wages fueled expectations that inflation is going up (put simply, if workers get paid more, they can spend more, driving up prices). This, in turn, may prompt the Federal Reserve Bank (the Fed) to increase interest rates faster than expected to keep inflation at a manageable level. As rates increase, saving money becomes more attractive than spending; less disposable income is spent therefore, and the economy slows decreasing inflation.
Markets reacted to this: bond prices fell because theyre worth less if interest rates are higher (new bonds thatll pay higher rates would be more attractive than todays lower-yielding ones). Stocks fell too because with higher rates, companies would have to pay more to borrow money to invest in growth and they may therefore choose to borrow less and grow more slowly.
Why should I care?
For markets: Investors are fearful of sharply higher interest rates.
Bonds have essentially been going down in price since last summer, but last week that selloff moved much more quickly, partly as a result of Fridays data. That suggests investors expectations for future interest rates are climbing quickly. One worry is that if interest rates continue to move sharply higher, the negative impact on economic growth will be immediate and severe, endangering stock prices further.
The bigger picture: A healthy US economy bodes well for global growth.
The US is expected to contribute about 15% to the worlds economic growth this year second only to China supported by recent tax reform and, potentially, Trumps big infrastructure spending plan. China is the USs biggest trading partner, so benefits from a strong US economy; while Chinas biggest trading partner is the EU, thus helping to drive global growth.
Originally posted as part of the Finimize daily email.
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