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Economics Weekly June 10, 2024

illustration of two people in front of a graph June 17, 2024

Payrolls increased in May, but unemployment rises

Data released last week painted a mixed picture of the strength of the labor market. The number of job openings fell from 8.4 million in March to 8.1 million in April, which was a sharper drop than forecasters were expecting – the consensus was 8.3 million. However, the increase in non-farm payrolls in May was much stronger than predicted with a rise of 272,000 against a Wall Street forecast of 185,000. Nevertheless, the payrolls data for the two preceding months was revised downwards, and the unemployment rate increased from 3.9% in April to 4.0% in May. It is worth noting that the strongest growth in payrolls in May were for healthcare and government jobs, which arguably are less interest rate sensitive than some other parts of the economy. Overall, we feel the figures are consistent with a labor market that is gradually slowing, which is a step towards a cut in the Fed Funds rate later in the year.

Turning to foreign news, the European Central Bank (ECB) and the Bank of Canada both cut their policy interest rates by 25 basis points last week. This is a reminder that many of the inflation pressures in the global economy have eased considerably, and the recent fresh burst of inflation in the USA is in a large part homegrown, reflecting a tight labor market. The Bank of England holds its rate setting meeting on June 20 with a cut as a possibility, but not a strong one. The Swiss National Bank became the first major central bank to cut rates back in March. On an international level the interest rate cycle is shifting towards cutting, which will have implications for the dollar exchange rate and U.S. trade.

This Wednesday will be a busy day for economists with the latest CPI inflation figures published, and the Federal Reserve rate setting committee announcing its decision for the Fed Funds Rate. Inflation remains too high for there to be any chance of a cut at this Fed meeting. However, the financial markets will be closely monitoring the statements at the press conference for clues on how far away a rate cut might be. 

Things to watch for this week

Wednesday, June 12

Core CPI Inflation, y-o-y, May

Previous: 3.6%
Forecast: 3.5%

With the Fed holding interest rates at a high level, we believe price pressures in the economy are now easing but only gradually. We are forecasting a slight deceleration for core CPI inflation (which excludes food and energy prices) in May.

Fed Funds Rate decision, June   

Previous: 5.25%-5.5%
Forecast: 5.25%-5.5%

Although the recent resurgence in inflation appears to have been successfully checked, price growth remain too high for there to be a rate cut at this meeting.