Weekly Market Update: August 15, 2022
The nation created 528,000 jobs in July. That figure far outpaced the consensus expectation calling for a roughly 275,000 increase. Through the first seven months of this year, nearly 3.3 million nonfarm payroll jobs have been added. The unemployment rate also fell to 3.5%.
The July labor report also raised some red flags. The 0.5% increase in the average hourly wage, the third straight month of acceleration, as well as the continued stagnant labor force participation rate, brought more concerns about wage inflation. The latter will likely force employers to continue raising wages to fill vacant positions.
The July Consumer Price Index (CPI) did show a moderation in prices. Specifically, the CPI was unchanged on a month-to-month basis, which was an improvement from the 1.3% gain in June. The recent retreat in the price of energy commodities was the main reason for the decline. That said, the CPI was up 8.5% over the last 12 months and the core-CPI, which excludes the volatile food and energy components, was still running hot, climbing by 5.9%.
The latest economic news will likely keep the Federal Reserve on its more-restrictive monetary policy course. The expectation is that the central bank will raise the benchmark short-term rate by at least 0.50% at its September meeting and also increase the pace of its bond-selling program next month. This will reduce the liquidity in the financial system—and ultimately the money supply—in an effort to slow demand and tame inflation.
Will the central bank’s monetary policy moves push the United States into a recession? The recent drop in energy prices and continued inversion of the Treasury market yield curve suggest such. The aforementioned strength of the labor market, though, may be just enough for the Federal Reserve to avoid a “hard landing” for the economy.
Conclusion: We don’t think this is the right time to throw caution to the wind. With the Fed intent on slowing demand, the economy showing signs of fatigue, and second-half earnings estimates for Corporate America coming down, the bulls will have their work cut out to sustain the recent rally on Wall Street.