Weekly Market Update: July 17, 2023
The nation added 209,000 nonfarm payroll positions in June, bringing the estimated total number of jobs created during the first half of 2023 to 1.67 million. The monthly figure fell short of the consensus expectation, but a gain of more than 200,000 still suggests tightness in the labor market.
There were aspects of the Labor Department report that Federal Reserve officials probably did not like. Specifically, the unemployment rate fell to 3.6% (from 3.7% in May), signifying that out-of-work Americans are not having a hard time finding new positions. This will likely force employers to be more competitive on the salary front to attract the labor they need, putting upward pressure on wages. On point, the average hourly wage increased 0.4% in June and was up 4.4% over the 12-month period, indicating that inflation remains sticky in certain sectors of the economy.
The June Consumer Price Index (CPI) report, though, indicates that inflation at the consumer level is trending in the right direction. Consumer prices increased 0.2%, which was stronger than the May advance of 0.1%. However, the core CPI, which excludes food and energy, rose 0.2%, which was half the prior month’s pace. On a 12-month basis, the CPI fell notably (from 4.0% in May, to 3.0% last month).
The Federal Reserve will soon commence its monetary policy meeting. After pausing on interest rates in June, the Federal Open Market Committee (FOMC) is expected to raise the federal funds rate, to a range of 5.25% to 5.50%. The market now seems to be pricing in that the Fed is close to the end of its interest-rate hiking cycle.
The hope of a “soft landing” for the U.S. economy remains plausible. The still-tight labor market and resilient consumer give credibility to this theory. However, the central bank must guard against overtightening the monetary reins and further hurting business and consumer loan growth, which is essential to economic expansion.
Conclusion: After a down start to July, the equity market got a boost from relatively benign June CPI data. But with market valuations looking frothy and still some uncertainty about when the Fed will conclude on the interest-rate hiking front, we continue to recommend holding stocks of high-quality companies.