Investment Fireworks Ahead?
By John Persinos
If inflation continues to ease and the job market shows signs of cooling, it's likely that the Federal Reserve will initiate interest rate cuts by the end of 2024. Such a move would light up the equity and bond markets like a July 4 fireworks show.
This Friday's release of the U.S. nonfarm payroll report for June is eagerly anticipated. Analysts predict an increase of 190,000 jobs, a decrease from the 272,000 added in May. The unemployment rate is expected to hold steady at 4.0%, with a slight uptick in the labor-force participation rate from 62.5% to 62.6%.
Average hourly earnings are projected to cool from a 4.1% year-over-year increase to 3.9%. These labor market trends are crucial indicators of consumer spending and inflation in the service sector.
Current signs suggest the labor market is decelerating, with an increased supply of workers and softening demand for labor. If this gradual slowdown continues without a sharp downturn, it could lead to reduced consumption and lower inflation, providing the Fed with the confidence to start reducing rates.
The Fed's next meeting on July 31 is expected to result in policy rates remaining at the current level of 5.25% – 5.50%, as gauged by the CME FedWatch Tool (see chart).
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