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Jobs market healthy, but is Fed pause coming?
The latest employment data continues to show a fairly solid labor market. But retail earnings are a worrisome sign. The Federal Reserve may need to hold rates steady.
The labor market hasn’t gotten the memo about a possible impending recession. Payroll processing giant ADP said in its latest monthly jobs report Thursday that 278,000 private sector jobs were added in May…far more than expected.
Those numbers come a day before the federal government will release the official jobs figures for May. Another jobs report, the one for weekly initial claims, also showed that the job market remains in pretty good shape. The number of people filing for weekly jobless benefits did tick up a bit from a week ago, to 232,000. But that is still relatively low historically and was below forecasts.
So what will this mean for the Federal Reserve, which will announce its latest interest rate decision on June 14? Is yet another hike coming? Maybe not. While odds were about 50-50 for a small rate increase just a week ago, fed funds futures on the CME are now indicating a more than 70% chance that the Fed will pause.
Why? For one, investors are heartened by the fact that inflation pressures continue to abate. ADP said Thursday that “pay growth is slowing substantially, and wage-driven inflation may be less of a concern for the economy despite robust hiring.”
That’s an encouraging sign. But the effects of inflation and higher interest rates (now at 5%) have been weighing on consumers for some time. And that’s all the more reason for the Fed to now proceed cautiously. Even though the job market is holding up, recession alarm bells are still ringing….especially when you look at what’s going on in the retail industry.
Macy’s is the latest major retail chain to paint an ominous picture. The company issued a weak outlook in its earnings report Thursday. CEO Jeff Gennette said that “we planned the year assuming that the economic health of the consumer would be challenged, but starting in late March, demand trends weakened further in our discretionary categories." Shares of Macy’s tumbled about 5% on the news.
Discount retailer Dollar General also gave a bleak forecast Thursday, sending its stock down nearly 20%. The company said in its earnings release that “the macroeconomic environment is more challenging than the Company had previously anticipated, which the Company believes is having a significant impact on customers’ spending levels and behaviors.”
In other words, the Fed’s rate hikes appear to be working. But at what cost? Jerome Powell may soon find himself scrambling to cut rates if the economy slows more dramatically than intended. Futures are pricing in a more than 60% probability that rates will be lower than they are now by the end of December.
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