Continued cooling in the labor market, as shown in the June jobs report, points to a September rate cut from the Fed as long as next week’s inflation data is cooperative.
An unexpected uptick in the unemployment rate from 4.0 to 4.1 showed the labor market continuing to soften, but without signaling an imminent recession. The increase in the unemployment rate was largely due to more people becoming unemployed, rather than more people joining the labor force, with the participation rate little changed from May. The widely used Sahm rule, which has perfectly predicted recessions in the past, looks for a 50 bps increase in the unemployment rate over the past year. With this report, we are up 43 bps. It is possible, however, that the Sahm rule may not work now as it did in the past as the post-pandemic economy has repeatedly defied previously held expectations. The jobs report also showed 206,000 jobs were created in June, slightly above expectations of 190,000, though it’s worth noting revisions to April and May data showed that 111,000 fewer jobs were created than previously reported. Average hourly wage growth came in at 0.3% MoM (3.9% YoY), consistent with expectations.
Today’s jobs report, along with the past two months of inflation data, puts the Fed on a solid path to a September rate cut, but there are three inflation reports before then. Fed officials have said for the past few months that since the labor market has cooled enough to no longer provide inflationary pressure, they are squarely focused on inflation data to guide their policy. The next CPI report will be released Thursday July 11. If that report comes in largely as expected, the Fed should be able to start laying the groundwork, perhaps as soon as their July 31st meeting, for rate cuts to start in September. If next week’s inflation data is especially weak, a rate cut in July may not be fully off the table, though it would feel aggressive in the context of a labor market that’s not yet weak.
For home buyers and sellers, today’s data further solidifies the expectation of lower mortgage rates to close out the year. However, we are still living in a world of elevated uncertainty as expectations around Fed policy may change quickly depending on each month’s inflation data and the increasingly turbulent road to the November U.S. presidential election.
