One of the significant macroeconomic topics from the past week was the release of the Federal Reserve (Fed) minutes, followed by the employment data.
The Fed's meeting minutes for June indicated that policymakers are supportive of further interest rate hikes. This development had a negative impact on both stock markets and gold. Currently, the markets are pricing in a 93% probability of a 25 basis point rate increase at the Fed's meeting at the end of July.
The second important development of the week was the employment data. First, we received the ADP private sector employment report, which showed a remarkable surge. Private sector employment increased by 497,000 last month, recording the highest increase since February 2022. Expectations were for a 225,000 increase. The stronger-than-expected data heightened anticipation for the non-farm payroll report. However, the non-farm payrolls fell short of expectations, with an increase of 209,000 jobs in June, compared to the expectation of 230,000 jobs.
Additionally, the non-farm payrolls for May were revised downward from 339,000 to 306,000. The unemployment rate declined from 3.7% to 3.6%. However, the attention was drawn to the increase in average hourly earnings. Nevertheless, the latest data suggests a cooling labor market in the United States, along with the negative impact of high interest rates and weak consumer spending on the economy.
This week, inflation data will be released in the United States. It is expected that headline inflation dropped to around 3.1%, the lowest level in two years, in June, while the core inflation, which excludes volatile food and energy prices, is expected to decrease to 5%, the lowest level in 18 months.
Economists believe that core inflation could further decline to a range of 3.5% to 4% in the coming months, depending on the price index.
Optimism stems from the slowing growth in rental prices, which is the first reason. Housing comprises about 40% of the core consumer price index (CPI), and it is also a crucial component considered by the Fed in the personal consumption expenditures price index, accounting for around 20% of it. The increase in the number of households had sharply driven up rents in the past two years. However, this increase has slowed down, and the supply of new apartment units has reached its highest level in 40 years.
For instance, shelter costs in the CPI increased by approximately 8% in May compared to a year ago. However, the national rent measure remained unchanged this June compared to a year ago after annual increases of 9% in June 2021 and 14% in June 2022.
The second reason for optimism is the expected decline in used car prices. Analysts believe that as new car production recovers, the prices of used cars will further decrease. This is a significant indicator because Fed officials rely on falling goods prices to offset high service costs.
