But the big story today is the June employment report just released.
Let me start by restating one truism that we shouldn’t ignore. The higher the net employment gain, the better it is for our economy. Period. In June, 224,000 net new jobs were created. After a May report in which the gain was only 75,000, this was an upside surprise. So why are futures this morning moderately lower? The obvious answer is that a stronger than expected economy would seem to lessen chances that the Federal Reserve will cut interest rates. The market is pricing in 2-3 rate cuts over the balance of this year. While a July cut is still a virtual certainty, future rate cuts would be less likely is the strength shown in June were to continue.
That, of course, is problematic. The July report could show another strong increase or it could repeat a weak number like the one in May. That is why Fed Chair Jerome Powell always reiterates that the market is data dependent and will consider every FOMC as a live meeting at which rates could go up or down. While the stronger than expected June number suggests an economy that doesn’t need to be supported by multiple rate cuts, that could all change over time.
Imbedded within the employment report was an increase in average hourly wages of 0.2%, below the 0.3% estimate. That continues to keep the focus on inflation which continues to run below the Fed’s 2.0% target. Wage acceleration is a key factor in any effort to raise the inflation rate. Thus, while the number of job increases may have exceeded expectations, the failure of wage growth to accelerate is a negative sign and one that will continue to make a July rate cuts an almost 100% certainty.
While the market’s initial reaction to the better than expected employment report was muted, it does suggest no dramatic change in course either for fiscal or monetary policy. The Fed is still likely to cut at least once this year and 2-3 cuts are possible. The 3-month gain in jobs of 174,000 does show deceleration and inflation does remain stubbornly too low. In addition, the yield curve remains negative over a large part of the curve and rates in Europe keep falling. Thus, a modest adjustment to market forecasts seems appropriate but a major change isn’t supported by today’s report. The next market mover will be earnings and reports will start coming in less than 2 weeks.
Today’s big birthday is Megan Rapinoe who turns 33 today. I’m sure the birthday present she wants most is a victory for the U.S. Women’s team in the World Cup final on Sunday.
James M. Meyer, CFA 610-260-2220
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