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Wednesday, July 24, 2024 | Back issues
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Conflicting economic reports have experts in a tizzy regarding Fed’s next move

Muddled employment data and divergent opinions on when the Federal Reserve will start cutting interest rates caused equities to tread water while bond yields rocketed up.

MANHATTAN (CN) — Two employment reports diverged in their findings this week, which had experts scrambling to pin down when the Federal Reserve will cut interest rates — and investors nervous about next week’s key inflation report.

On Friday, the federal jobs report showed the U.S. economy added 272,000 positions last month, despite a rise in unemployment to 4%. However, a few days earlier, payroll company ADP’s jobs report showed just a 149,000-job gain in May.

“While strong on the surface, the labor market sent some mixed signals in May,” said Lydia Boussour, senior economist at EY Parthenon. “We continue to believe a July onset of the easing cycle would be optimal given easing inflation and softening labor market conditions, but the risks of a delayed onset in September are growing.”

By the closing bell on Friday, the Dow Jones Industrial Average increased 112 points, while the S&P 500 gained 70 points and the Nasdaq netted 398 points. Yields on 10-year Treasury bonds increased significantly for the week, hitting 4.43% around the closing bell.

The employment data this week likely won't move the needle for the Federal Reserve, many experts say. Others believe the Fed is targeting September for the first rate cut.

“The labor market remains healthy enough to allow Fed policy decisions to be primarily guided by readings on inflation,” Nancy Van Der Houten of Oxford Economics wrote in an investor’s note on Tuesday. “April data on inflation were encouraging, but the Fed needs to see more than one month of good data before lowering interest rates.”

Yet other economists point to after the general election in November as to when the Fed may act next, writing that the jobs report makes next week’s consumer price index release all the more crucial.

Abroad, central banks already have started cutting rates. On Thursday the European Central Bank cut its three key interest rates by 25 basis points, its first rate cut since September 2019. The bank's governing council justified its decision by noting inflation has fallen by 2.5% since last fall and that “inflation expectations have declined at all horizons.”

The rate cut was largely ignored by markets, which had expected it since March. Some experts believe the European Central Bank will cut rates again in September and in December by a total of 50 basis points.

On Wednesday, the ISM Services index bolsters the theory the retail sector is slowing down but that restaurants and hotels continue to grow, as the index rose from 53.8 last month from 49.4 in April. The business activity segment of the index also increased dramatically from 50.9 to 61.2.

“The increase in the composite index in May is a result of notably higher business activity, faster new orders growth, slower supplier deliveries, and despite the continued contraction in employment,” Anthony Nieves, chair of ISM’s business survey committee, said in a statement.

However, Nieves added, “the majority of respondents indicate that inflation and the current interest rates are an impediment to improving business conditions.”

The related ISM Manufacturing purchasing managers index released at the start of the week told a slightly different story, with the index falling slightly to 48.78 from 49.2. While that reading indicates manufacturing inflation is moderating a bit prices are still high.

The drop in the index “adds to the sense that the economy is losing momentum, while the drop back in the prices paid index should soothe concerns about a potential renewed rise in goods price pressures,” economist Thomas Ryan from Capital Economics wrote in an investor’s note.

Follow @NickRummell
Categories / Economy

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