Signs are growing of a top in both inflation and job gains
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The U.S. economy looks to be on the verge of hitting two highs simultaneously — peaks in inflation and job creation that could be important influences on the path of monetary policy. May’s Nonfarm Payrolls Report confirmed previous evidence that, while the economy is strong, it could see future gains. At the same time, investors will be watching Friday’s consumer price index report for more indications that inflation, though still strong and running well above anything the U.S. has seen since the early 1980s, is cooling — if only incrementally. Over the next months, the Federal Reserve will closely monitor both indicators to determine how tight they have been beyond two rate increases of 50 basis points expected this summer as well as the beginning of balance sheet compression that began in June. As things stand, markets are pricing in strong probabilities of half-point rate hikes in not only June and July — as Fed officials have strongly indicated — but also September. Recent statements by policymakers suggested that they will use two increases in summer to test inflation. From September, they will continue as needed. According to the trends in employment and inflation, there could be some room for Fed officials. Although Friday’s jobs report showed a 390,000.000 increase, this was still below Wall Street expectations. It also marked the lowest monthly growth since April 2021. The average hourly wage, which is another important inflation indicator, was up 0.3% month-over-year, but still at 5.2%. Joe Brusuelas is chief economist of RSM. He stated, “This is probably going to the last robust employment report this business cycle.” He said, “What we are observing is an unfortunate interplay of inflation and hiring.” Overheating of the economy caused inflation to rise, as well as the need to adapt to the effects of the pandemic. This all leads to overheating in both the tech and small business sectors, where there are already signs of an easing of demand. Brusuelas predicted that the jobs market will slow from its current pace of 560,000 jobs per month in 2021 to more like the previous trend of around 200,000 each month. Other signs indicate that there are weakening employment trends: ISM Manufacturing’s June Employment indicator showed a moderate pullback. Surveys of small businesses also indicated slowing, or even complete freeze, in hiring. And the Fed’s Beige Book last week reported that unemployment was up “modestly to moderately” across all 12 Fed districts. Brusuelas explained that this year’s slowdown in private payroll gains is “a pretty significant sign that things are starting to boil”. Although the inflation decline is not as notable, it’s still quite significant. The headline CPI month-over-month increase is 0.7%, but only 0.5% ex-foods and energy. Friday’s CPI report will be out. Both numbers will translate to annual gains of 8.2% & 5.9%. This is still an impressive number, but it would be a continuation lower than the March peak. Drew Matus of MetLife Investment Management said that Fed officials should carefully evaluate the data, and refrain from announcing a faster rate-hiking plan. If they hike 50 basis points in the two next meetings by September 21, then what data will you be dependent on? Matus stated that he doesn’t believe they are aware of the situation and they don’t know how to do it now. It would be a good idea to show some humility during August. A cooling economy and lower inflation are both welcome by the Fed. Officials have made it clear that they will not be affected by any short-term data changes and intend to continue pushing rates higher up until the labor market is back in balance. Inflation continues to fall from its current level. There are many indicators of inflation that I am looking at. Loretta Mester from Cleveland Fed stated that the Cleveland Fed president wants monthly numbers and increases to be on a downward path. It will take convincing evidence. This cannot be a matter of one month. Mester stated that she does not believe inflation has reached its peak, but she anticipates Fed policy will begin to take effect.
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