The non-farm payrolls report shows a slowdown in the labor market, and the market's focus has shifted to the CPI data for June, which will be released on Thursday of this week.
After last Friday's non-farm payroll data was released, the pricing of the swap market increased bets that the Fed will cut interest rates for the first time this year in September. The FedWatch tool on the CME Group's website shows that the swap market expects the Fed to cut interest rates by 25 basis points in September, with a 71.6% probability.
Analysis believes that the June non-farm payroll report has strengthened the market's expectation of a rate cut in September, and this week's CPI report is expected to be another confidence booster.
Does the June CPI raise expectations of a rate cut in September?
The US non-farm payrolls report for June shows a decline in new jobs compared to the previous month and an increase in the unemployment rate from 4% to 4.1%, the highest level since November 2021. The number of new jobs added in April and May was also revised down by a total of 111,000, indicating a cooling of the labor market.
Nancy Vanden Houten, Chief US Economist at Oxford Economics, said in a report:
"Fed officials are increasingly concerned about downside risks to the labor market, and the June data supports our forecast that the Fed will cut interest rates at its September and subsequent meetings."
Neil Dutta, Chief Economist at Renaissance Macro, also said that the June non-farm payroll report "has made the expectation of a rate cut in September more firm."
However, the non-farm payroll data only reflects an economic slowdown, and inflation remains a key factor blocking the Fed's path to interest rate cuts.
May data showed that the year-on-year growth rate of core CPI fell to a three-year low, indicating that the anti-inflation measures have been effective. This means that Thursday's CPI data may greatly affect the Fed's ability to cut interest rates in September.
According to the median forecast of economists surveyed by Bloomberg, the year-on-year growth rate of core CPI in June will remain unchanged from the previous month at 3.4%, and the year-on-year growth rate of CPI in June will further slow to 3.1%, indicating that inflation is steadily trending towards its target.
Bank of America economist Stephen Juneau expects:
"Following a completely good performance in May, the June CPI report will be another confidence booster."
As of publication, the FedWatch tool on the CME Group's website shows that the swap market expects the Fed to cut interest rates by 25 basis points in September with a 71.6% probability.
In addition, on Tuesday and Wednesday of this week, Powell will head to Capitol Hill for the semi-annual monetary policy testimony, during which investors will closely watch for any comments related to monetary policy.
Edited by Jeffrey