Following the release of the June jobs report, which revealed a slight cooling but still robust condition of the labor market, investors are eagerly awaiting a crucial inflation report scheduled for Wednesday. This report is expected to provide further insights into the overall health of the economy. However, some investors believe that the results will have limited impact on the Federal Reserve's decision regarding interest rates.
Here's what unfolded: In June, the labor market experienced an addition of only 209,000 jobs, falling short of economists' forecasted net increase of 225,000 jobs. This represents the smallest monthly growth since a decline observed in December 2020.
Nevertheless, beneath the surface, the jobs market remains strong. Average hourly earnings growth remained steady at 0.4% from May, with a consistent year-over-year rate of 4.4%. This suggests that wage inflation is persisting. Additionally, the unemployment rate declined to 3.6% from 3.7%, although the jobless rates for Black and Hispanic workers saw a significant rise.
Scheduled for Wednesday, the June Consumer Price Index (CPI) report holds significant importance as a measure of inflation.
According to Refinitiv, economists anticipate a 3.1% rise in consumer prices for the year ending in June, marking a slowdown from the 4% annual increase observed in May.
Recent data indicates a moderation in inflation, although it remains above the Federal Reserve's targeted 2%. In May, the Personal Consumption Expenditures (PCE) price index, which is the Fed's preferred inflation indicator, recorded a 3.8% increase over the previous 12 months. This figure is lower than the revised 4.3% annual rise seen in April.
However, unless the June CPI report delivers a significant surprise in either direction, it is unlikely to alter the Fed's trajectory for interest rates. Recent statements from Fed officials suggest a likelihood of further rate hikes, as noted by James Ragan, Director of Wealth Management Research at DA Davidson.
Nonetheless, investors should not anticipate a continuous series of rate hikes from the Fed. Candice Tse, Global head of strategic advisory solutions at Goldman Sachs Asset Management, predicts that the Fed will soon approach its terminal rate, indicating the conclusion of its most aggressive tightening campaign in recent times.