Everything that goes up...

Perhaps the law of gravity hasn’t been repealed after all. 

Given the unprecedented speed and magnitude of the Federal Reserve’s rate hiking cycle, markets have been expecting the U.S. economy to slow, particularly in the labor market. The fact that it has not happened yet has befuddled investors and led them to expect more Fed rate hikes. 

The June employment report perhaps has opened the door for a reassessment of this view. In June, the economy added 209,000 jobs, down from the revised lower total of 306,000 in May. Private sector payrolls increased by only 149,000, the slowest gain since December 2020. Before the Fed breaks out the champagne, however, the unemployment rate ticked lower, from 3.7% to 3.6%; average weekly hours worked ticked higher, from 34.3 to 34.4 hours; and average hourly earnings rose 0.4%, to $33.58, or 4.4% over the last year. So, this was a solid report and points to a still robust labor market, though perhaps moving in a less inflationary direction. 

Other data released last week painted a nuanced picture. Weekly jobless claims continued to increase, from 236,000 to 248,000, above the 2019 pre-pandemic levels and steadily moving higher. The Institute of Supply Management Services (ISM) Index rose sharply, driven by stronger new orders, employment gains and lower prices paid. That’s the good news, but the bad news is the ISM Manufacturing Index slipped further into contractionary territory, on weaker employment, lower prices paid, but an increase in employment. The economy is overwhelmingly service-oriented, but the manufacturing component tends to have higher wages. After these reports, the markets still expect the Fed to raise its fed funds rate at its July 26 meeting, but will look to reassess after receiving the Consumer Price Index report on July 12.