Fed rate cuts unlikely as market fails to provide strong indicators
Summary
On Tuesday, July 2, Fed Chair Jerome Powell told the audience at an ECB conference in Portugal, “Inflation, after pausing in the first quarter, shows signs of resuming its disinflation trend.” Although this is good news in general, Powell noted the Fed wants increased confidence this trend will persist before beginning to loosen its policy. For the last year, the Fed has kept its target rate steady at 5.25%–5.50%. Chair Powell went on to say that the Fed wants to be sure the recent levels are a “true reading” as to what’s happening to underlying inflation before lowering rates and laughed when asked if the Fed would be cutting rates at its mid-September meeting. Last December, when many were pressing the Fed to cut its policy rate, inflation data subsequently showed readings of over 3.00% for the following three months.
Job openings rebound with new jobs added showing lowest number in five months
May job postings rose to 8.10 million, from 7.90 million in April, according to a statement by the Labor Department on Tuesday. Although new openings are still well below the record high of 12 million in 2022, they are still higher than pre-pandemic levels, with this trend suggesting that there is still plenty of demand in the U.S. labor market. While many businesses are continuing to hire, high interest rates have resulted in a reduced need for labor. Some businesses indicated they plan to wait until rates fall and demand picks back up before adding new workers. Robert Frick, corporate economist at Navy Federal Credit Union said, “There are no indications that job growth will flag this year, so consumer spending power will continue to increase.”
However, U.S. businesses added only 150,000 new jobs in June, marking the smallest increase in five months. This tells a contrasting story that the labor market may be cooling. Economists at the Wall Street Journal forecasted a gain of 160,000 jobs. The Chief Economist at the ADP, Nela Richardson, said, “Had it not been for a rebound in hiring in leisure and hospitality, June would have been a downbeat month.” About 63,000 of the 150,000 jobs added in June were generated by hotels, restaurants, and other businesses of a similar nature. While the ADP only tracks private sector hiring, the U.S. jobs report includes government workers.
Jobless claims rise and remain at a nearly one-year high
The number of Americans who applied for unemployment rose to 238,000 last week and remained at a nearly one-year high, largely because of big increases in New York, New Jersey, and California. New claims rose by 4,000 from the prior week. These were typically small increases, but New York claims shot up by 39.00%. It’s too soon to tell if the recent rise in jobless claims represents weaker hiring, an increase in layoffs, or seasonal changes in employment tied to the beginning of summer and/or the school year ending. The annual summer shutdowns of auto plants to retool for new models could complicate matters because temporary layoffs associated with the shutdown tend to make jobless claims more erratic during the summer.
U.S. trade deficit widens in May
The U.S. international trade deficit widened 0.80% in May to $75.10 billion, the largest deficit since October 2022, as exports decreased more than imports. This widening is expected to subtract from GDP for a second straight quarter. The drop in shipments of goods overseas was led by a decline in value of industrial supplies, aircraft, and automobiles. The lower demand for U.S. goods and services was brought on by limited economic growth overseas and a strong U.S. dollar.
Source: FRED
U.S. jobs report
Friday’s June jobs report showed that the U.S. created 206,000 new jobs, a solid amount. However, this news was countered by the latest unemployment report, which showed signs of deterioration in the labor market. This new indication could significantly weigh on the Fed’s decision to cut rates in the near term. Not insignificantly, the jobs report showed that one-third of the new hires in June were government employees. The private sector’s addition to the new jobs created was viewed by some as “softish” according to MarketWatch. Wage growth rose again in June, but the increase in pay slowed some, to 3.90% from 4.10%, matching the lowest levels in three years, reassuring the Fed that wage growth is slowing to more sustainable levels.
The week ahead
Next week will bring the CPI/PPI and Core CPI/PPI releases, giving the marketplace additional insight into the Fed’s likely plans for rate cuts in the near term. Without a clear confirmation on Chair Powell and the Fed’s intentions, rates may continue to hold steady.
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About the author
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Amol Dhargalkar
Managing Partner, Chairman
Kennett Square
Amol Dhargalkar is a Managing Partner and Chairman for Chatham’s Board of Directors. He brings over 20 years of experience in derivatives capital markets expertise.
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