Job Market Cools Along with Inflation
Week in Review
Despite the shortened holiday week, the market was inundated with a plethora of economic data all pointing in the same direction: The U.S. economy appears to cool down, although this comes after a period of remarkable growth in the post-pandemic years. Additionally, indicators suggest that inflation is also on track to resume its gradual decline.
Two key areas of the U.S. economy have shown signs of moderation in recent months: the services sector and the labor market. The Institute of Supply Management's (ISM) Services index for June came in well below expectations at 48.8, indicating a contraction in the non-manufacturing economy. Similarly, the June nonfarm jobs report added 206,000 jobs, slightly below the previous month's 218,000 which had been revised down by 54,000. The U.S. unemployment rate also saw a slight increase from 4% to 4.1%, surpassing the Federal Reserve's predicted rate of 4% for the year.
However, this cooling economy may have a silver lining as inflationary pressures are expected to ease. The ISM's prices paid indexes, which are often seen as a leading indicator for goods and services inflation, came in below expectations and are currently at their lowest point since the pandemic. Additionally, the nonfarm jobs report showed wage gains of 3.9% annually, down from May's 4.1% and the lowest it has been since the pandemic.
In our assessment, if inflation continues to moderate and the economy remains stable, the market should continue to perform well. It suggests that the Federal Reserve will likely initiate a cycle of interest rate cuts, even as the economy maintains steady growth levels. However, if the economy falters and the Fed is forced to lower interest rates in order to support growth, the market may not fare as well. Thankfully, we do not see any significant signs of this occurring. It is worth noting that the economy and labor market started from a position of extraordinary strength, and the current slowdown may simply be a return to normal levels.
Economic & Earning Calendar
Next week, investors will be keeping a close eye on U.S. inflation data and the first round of second-quarter earnings. Federal Reserve Chair Jerome Powell will also be in the spotlight, as he testifies before lawmakers for two days.
On Thursday, Delta Air Lines and PepsiCo will release their earnings, followed by big banks such as Bank of New York Mellon, Citigroup, JPMorgan Chase, and Wells Fargo on Friday, which officially kick off earnings season.
The Bureau of Labor Statistics' consumer price index for June will be the key economic indicator of the week, with a consensus estimate of a 0.1% increase following a stagnant May. The core CPI, which excludes food and energy prices, is expected to rise by 0.2%. On Friday, the BLS will also publish the June producer price index.
Powell's Semiannual Monetary Policy Report to Congress will also take center stage next week. He will first testify before the Senate Committee on Banking on Tuesday, before appearing before the House Financial Services Committee on Wednesday.
Chart of the Week: Job openings by Sector
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