I expect the Friday, July 7, jobs report for June to be decisive in the Federal Reserve’s July 26 decision to raise/not-to-raise its benchmark interest rates. The CME FedWatch Tool current calculates the odds of a 25 basis point increase at 86.2%.
The Bureau of Labor Statistics will release the Employment Situation Report on Friday. Economists are projecting that the economy added just 200,000 jobs in June. In May the economy added 339,000 jobs. Economists project that the unemployment rate will hold steady at 3.7%.
I think the low forecast likely sets the financial markets up for some volatility when the report actually shows growth of better than 200,000 jobs. But I don’t see the report coming in so strongly that it shifts market expectations from a 25 basis point increase in July 26 to 50 basis points at that meeting. Where I do think a strong report could make a difference is in expectations for the September 20 meeting. Right now, the FedWatch Tool says the market is projecting only a 21% chance of a second 25 basis point interest rate increase at that September meeting (after a 25 basis point move on July 26.) A significantly stronger than expected jobs report for June is likely to push the odds of a September rate increase higher.
There is, of course, the possibility that the economy delivered fewer than 200,000 jobs in June. That would be a huge drop from May and I think it’s unlikely.
A strong jobs report for June is likely to push Treasury yields higher. This morning (June 3) the yield on the two-year note’s yield exceeded the yield on the 10-year Treasury by as much as 110.8 basis points as the shorter-maturity rate reached 4.96%. The inversion touched 110.9 basis points in March, a level last seen in the early 1980s (and you know how that turned out), according to Bloomberg. The inversion eased slightly during morning trading—-to around 108 basis points—-after the ISM Purchasing Managers Index for the manufacturing sector for June unexpectedly declined to a three-year low. An invasion of the yield curve of this dimension is frequently an indicator of a coming recession. However, this yield curve has been inverted for months now and a recession is still only “impending.” (An inversion of the yield curve results when yields for short-term Treasuries rise above the yield for long-term Treasuries. Normally, longer-term Treasuries pay a higher yield since buyers are being asked to lock sup their money for a longer period.)
One other data point to watch in the June jobs report is the unemployment rate. The data on the number of jobs created and the unemployment rate come from two different surveys that aren’t always in sync. In May, despite the 339,000 increase in jobs, the unemployment rate moved up to 3.7%. Something called the Sahm Rule says, watch out when the 3-month average of unemployment rate rises by 0.5% over its 12-month low. That is, historically, a strong signal of an impending recession even as the economy keeps adding jobs. If the May rise in unemployment of 0.3%, is repeated in June, then there is a risk that the United States could be flirting with recession. However, recent spikes in monthly unemployment have all subsequently reversed. So no need to run in fear but something to watch, certainly.
After Friday’s employment report, the next report with the potential to move stocks comes on July 12 with the numbers for CPI inflation in June. Economists are expecting that lower energy prices will continue to push the headline all-items inflation rate lower but they also worry that the core inflation rate, which excludes food and energy prices and is the rate that the Federal Reserve watches, will have held steady at elevated levels for the month.