For policymakers and investors the bad news can be positive when it comes to the latest information regarding the state of the employment market.

The stock market climbed on Friday after new data revealed that the amount of jobs created in the economy was slightly more than was expected, which helped keep the unemployment rate at a low level, though wages did not grow at the rate economists predicted.

The good news for the market follows a slow start to 2023. the S&P 500 increasing by 1.8 percent during the midday market on Friday, and set to close the first week of trading with a slight gain.

Investors have been watching the labor market for clues on the direction for interest rates through 2023. In the past the Federal Reserve sought to slow the pace of economic growth by increasing rates quickly in an effort to bring down inflation that was soaring.

In the final quarter in the calendar year the data suggested that inflation might have started to slow. But the labor market is an essential piece of this puzzle. There is a fierce competition for workers, pushing wages up and inflaming inflation. That's why the strong labor market has not been good for the Fed's efforts to curb the rate of inflation.

"Recent inflation readings have lifted investors' spirits, but ongoing labor market tightness suggests that interest rates might have to go higher for longer than markets currently imply," said Ronald Temple, the chief market strategist at Lazard prior to the figures were announced.

This is why the slowing of wage growth was greeted on Friday by investors looking forward to the end of Fed's rate increases which have increased the cost for businesses and pushed the prices of stocks down.

Mr. Temple's comments suggest a change in the expectation of interest rates, with a lot of investors reassessing their outlooks on the rate at which Fed officials will increase rates, and for how long they'll continue to keep borrowing costs high.

A two-year Treasury yield that is a sensitive indicator of the changes to Fed policy, fell and is now trading just under 4.3 percent. Investors are betting on an increase of quarter-points at the next Fed meeting in February. This is a change from the half-point increase in December which was already a decrease from the massive three-quarter-point hikes which occurred at the last four sessions. The Fed's rates are currently set at an area between 4.25 and 4.5 percent.

The Fed has warned investors about being too optimistic and thinking about the end of the Fed's war against inflation prior to it being ended. The rising prices of stocks in response to the signs of falling inflation benefit investors, resulting in a rise in the demand for stocks, and ultimately increasing inflation.

"An unwarranted easing in financial conditions, especially if driven by a misperception by the public of the committee's reaction function, would complicate the committee's effort to restore price stability," recorded the in the minutes from the meeting of December published this week..

For certain investors, this increases the risk of the economy suffering a worse downturn as the Fed's commitment to fight inflation is at risk of tumbling economic growth into recession.

"With the record-low unemployment rate indicating that there is still so much work ahead of them, Fed policy rates are set to rise above 5 percent within just a few months, and a hard landing looks to be the most likely outcome this year," said Seema Shah, who is the chief strategist for the global market of Principal Asset Management. "The recession clock is ticking."
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