? Hopes that the Fed will ease up on the pace of rate hikes are likely to be disappointed.
? The labour market data last week suggests the economy is starting to weaken, but the weakening is in
early stages.
? We are expecting 75-basis point hikes at both the July and the September FOMC.
? The Fed has a dual mandate – jobs and price stability.
? Jobs are plentiful, with the unemployment rate comparable or lower than anything seen in 65 years.
However, inflation is at the highest levels in 40 years.
In a week light on significant data, the S&P 500 moved up with technical oscillators. But in the
absence of fundamental drivers, it may run out of momentum within a couple of weeks, with 3970-4010
the next technical resistance zone.
The Fed Funds Futures market’s pricing of rates probabilities by the March 2023 FOMC turned more hawkish again, after a bout of dovishness late in June.
• The most popular bets in the Fed Funds Futures market are suggesting a 75-basis point hike in July, a 50-basis point hike in September, another 50-basis point hike in November, and then tapering off to a
25-basis point hike in December.
• A reading of the current data – both inflation and jobs data – suggests this may be wishful thinking.
• Our expectation is for a 75-basis point hike in July, another 75-basis point hike in September, a 50-basis point hike in November, and then another 50-basis point hike in December.
• The Federal Reserve has a dual mandate – jobs and price stability.
• There are few compelling reasons why the Fed would ease the pace of rate hikes soon. Inflation is at its highest in four decades. But jobs remain plentiful. This is Fed’s window of opportunity to strike hard at inflation, without raising unemployment to a socially unacceptable level.
Last week’s initial jobless claims data showed continuation of the uptrend from its mid-March low. But that is hardly going to slow the Federal Reserve’s rate hiking.
• US initial jobless claims uptrend from mid-March did suggest some easing in a red hot jobs market.
• The latest data released last week showed initial jobless claims rose another 4,000 to 235,000. This compares with the mid-March low of 166,000.
• However, this was well short of the 350,000-400,000 claims that typically herald a US recession.
• Although US GDP growth will likely slow significantly in 2Q22, the jobs market – which is a major concern for the Fed – is still far from recessionary conditions.
US job openings continued to ease in May. This suggests the month of March may have been the peak of the job market. But this slight easing is far from sufficient to cause the Fed to panic about the pace of rate hikes.
• The JOLTS (Job Openings and Labor Turnover Survey) data for May showed a 427,000 drop in job openings for May compared to April.
• This is another sign of a slowing economy. But again, it is still far from recessionary. We would expect the yearon-year change to go negative before a recession becomes imminent.
• Currently, it is still running at a 16.8% year-on-year growth rate.
• The unemployment rate of 3.6% for June compares very well with the cyclical lows of 3.4% to 5.7% dating back to 1957. Rather than fearing it could fail on the jobs side of its mandate, the data is
telling the Fed that the labour market is running too hot, with jobs still going begging for workers.
Similarly, US non-farm payrolls data last week showed the US added another 372,000 jobs in May. Looking at the year-on-year change to gauge where we are in the cycle, the May data showed 4.3% growth for June. Typically, this figure approaches zero before a recession.
Another indicator of the health of the jobs market – the aggregate weekly payrolls index – rose a
strong 8.0% in June, compared to 4.3% in May.
The US economy has been in an environment of slowing growth and rising inflation over the past 8 months. While these two forces are over time contradictory, they have emerged simultaneously before in the past. This speaks of the lags before a slowing economy eventually brings down inflation.
