Some more (but confusing!) data

Michael Rudd, CFA | President, CEO & Portfolio Manager

Over the past few months, we have been writing about the trajectory of the US economy and the different ways that the US Federal Open Market Committee (FOMC) might approach the path of administered interest rates. Depending on how inflation changes and the potential for economic slowdown/recession, we felt that there was potential for another hike and then multiple cuts in the new year. We last wrote about how the futures market was implying only a slight chance of a “June” hike and then expecting rate cuts in 2024. Hopefully this would result in a soft landing, along with moderating inflation. We also said that we were keen to see the coming June employment and inflation data. Today we received the “June Jobs Report” and the data has caused some market reaction.

The Jobs report is made up of two surveys: household and business.

• In the household survey, details showed people entering the labor force had a tough time finding a job. There was also an increase in previously employed people who found themselves unemployed. The unemployment rate jumped higher to 3.7%. This indicates that the job market might be slowing.
• However, the business survey indicated that 339,000 jobs were created, the 14th straight month it beat street estimates. Also, non-management wages rose 0.5%, the most in six months. This, on the other hand, indicates strength.
• Average hourly earnings rose 0.3% in May after being revised down 0.4% a month earlier. Year-on-year earnings were up 4.3%, the smallest increase since mid-2021. This indicates employment weakness and potential inflation moderation.

Figure 1 again presents the interest rate increase probability as calculated from Fed Futures. Please note that the market is now implying a 50/50 chance of a full 25bp rate hike in July. This was effectively 0% when we wrote our last Outlook.

“This means that” the data caused treasury yields, along with global equity markets, and the US dollar to jump higher. Another puzzling reaction. Inflation data will be released the week after next, just ahead of the June FOMC meeting and we will continue to monitor this closely. The trajectory of the US economy is important for all investors.

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