Indiana Trust Wealth Management
Investment Advisory Services

by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The US equity market, represented by the S&P 500 index, rose 1.8% for the week ending June 2.
  • ​The jobs report this week pointed to a resilient yet cooling labor market. Will the slow slowing of the US economy be enough for the Federal Reserve to pause its interest rate hiking cycle in June? 

The consensus across economists for the closely watched monthly employer survey was the addition of 195,000 jobs for the US economy in May. The report, released on Friday, reflected 330,000 jobs added, beating expectations for the fourteenth straight month. Economists may need to update their forecasting models in the aftermath of the pandemic and all that followed (federal government policy response, etc.). 

Source: Bespoke Investment Group, June 2023

There was plenty to like in the jobs report. May’s job gains were broad based across most industries, and the prime-age employment participation rate for women hit an all-time high.

There was also data in the report that pointed to a slow cooling in the labor market. Total hours worked declined, and average hourly earnings continued its moderating trend and now sits at about 4%.

These latter details matter a great deal to the Federal Reserve. Most economists believe that inflation is primarily driven by wage growth. The Federal Open Market Committee, the part of the Fed that makes decisions on interest rates, should be encouraged, if not satisfied, by the trend in wages.

For the FOMC, the data on the employment side of its mandate is coming around to support a “pause” or “skip” on another interest rate increase at its June meeting. The macroeconomic data is painting a picture of a slowly slowing US economy, which is what the Fed has tried to engineer with the tools at its disposal.

The question is whether the Fed feels it has made enough progress on the inflation side of its mandate. There will be debate at the FOMC whether the economic slowing needs to be sped up with additional interest rate hikes to bring down inflation more directly.

The Fed’s rate hikes have been the proximate cause for equity market volatility over the last 18 months. However, more recent interest rate hikes have been shrugged off by the stock market, for the most part. One possible reason for this is that rate hikes from higher interest rate levels have less of a valuation impact on financial asset prices versus the effect of hikes from low (zero) interest rate levels.

That includes bond prices, which may indirectly impact investor flows to stocks. Rate hikes from higher current levels would cause bond prices to decline, but not by as much as witnessed last year. That would lessen the impetus for portfolio rebalancing from stocks to bonds.

More rate hikes from the Fed to speed up the slowing of the economy would not be cheered by financial markets, but rate hikes may not have the same impact as they did in 2022, when rates began the year at nil.


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