After a hotter-than-expected jobs report last week, the big question going into this week: Has core inflation continued to ease, or has disinflation stalled in May?
The May jobs report came in surprisingly hot, with higher employment growth and higher wage growth than anticipated.
The U.S. added 272,000 jobs compared to the market expectation of roughly 190,000 jobs. This was a large shift even after accounting for the downward revision in the March and April numbers.
As with recent reports, the job gains were concentrated in health care, government, and leisure and hospitality. Combined, these three sectors contributed to 56% of all jobs created in May. But ultimately, the metric that everyone – including Fed officials – paid attention to: the advance in wage inflation.
Average hourly earnings advanced 0.4% in May, up from 0.3% in April. Annual wage growth was 4.1%, up slightly from 4% the prior month. Without a persistent increase in the size of the labor force, the labor market could remain tight and wage growth could remain difficult to tame. Wage growth is nowhere near a level that is consistent with 2% annual consumer price inflation.
Bond yields rebounded sharply at the end of the week, partly undoing some of the easing in financial conditions that began at the end of last month.
This week’s main event will be the Federal Reserve Chair’s press conference shortly after the release of the May Consumer Price Index (CPI).
Headline inflation – measured by the CPI – was up 3.4% in April compared to April 2023. Core inflation was up 3.6% over the previous 12-month period. Similarly to wage growth, core inflation had also advanced 0.3% in April.
While the Fed’s decision to keep interest rates unchanged in June is fully priced in, prepare for more financial market volatility as investors react to another CPI report that could shed more light on whether the forecast of two to three rate cuts in 2024 is still appropriate.
