Context: A Look Back at the Week
Despite the World Cup and a shortened week due to the US Independence Day holiday, last week delivered a slew of interesting economic data and market action. The overarching themes were a cooling of the US labor market, which helped moderate recent rate-hike fears, mixed legal judgments regarding the outlook for Federal Reserve independence, and further equity market rotation amid somewhat higher yields.
America’s June jobs report, released on Thursday due to the federal holiday, was the marquee data release. Nonfarm payrolls increased by 57,000, about half the consensus forecast, while the estimates for the previous two months were revised lower. The unemployment rate ticked down to 4.2% from 4.3%, as the labor force participation rate slipped from 61.8% to 61.5%. Combining all these numbers with solid earnings growth suggests that the supply side is currently the dominant driver of the labor market.
The Federal Reserve remained a focal point throughout the week, and not just because of less hawkish market expectations for rate hikes this year. New Fed Chair Kevin Warsh made it clear again that he is shifting the central bank away from explicit forward guidance. Judging from the remarks of governors attending the annual ECB Forum in Sintra, his reform-oriented approach seems to be acting as a catalyst for other major central banks – including an ongoing shift, to quote ECB President Christine Lagarde, from forward guidance to framework guidance. Meanwhile, at home, the Supreme Court opted by a narrow majority of one for a “procedural judgment” on the Lisa Cook case, preserving her job at the Fed but sending ambiguous signals about some underlying issues.
On trade, the US opted not to renew the agreement with Canada and Mexico in its current form. This will shift the USMCA to annual reviews.
After weeks in the co-pilot seat, the Strait of Hormuz took a back seat last week with the further relaxation of production and shipping constraints. This continued to deflate the oil risk premium, sending Brent crude prices to the low $70s per barrel and WTI below that level. This is a welcome respite for the global inflation outlook, which was supported last week by better-than-expected readings out of Europe and some other countries.
Despite the softer jobs data easing rate expectations, risk assets had a turbulent week beneath the surface. The AI and semiconductor trade remained volatile, both in the US and especially in Korea. This followed a solid end-of-quarter performance for stocks overall—an outcome not shared by Bitcoin, gold, and oil.
The Week Ahead
Looking ahead to the coming week, the markets return from the long US holiday weekend to a calendar focused on the health of the services sector, central bank minutes, and early consumer-facing earnings.
The US ISM Services PMI will serve as a gauge of whether the services sector is keeping pace with AI in driving economic expansion. This will come just before the release of the Fed minutes from the June 16-17 FOMC meeting, which will provide the first (partial) behind-the-scenes look at the committee’s deliberations under Chair Warsh. Recall that the Chair opted out of the dot plot—signaling his distaste for this approach to communication—and that there remains a tricky balance within the FOMC between those worried about sticky inflation and those more focused on potential labor market vulnerability.
As the UK heads toward appointing a new Prime Minister this month, this week’s report on fiscal issues by the Office for Budget Responsibility (OBR) will provide a sense of the new government’s room for maneuver. We also get the Bank of England’s Financial Stability Report, which is always an interesting and important read.
China releases its June CPI and PPI figures, offering further insight into the health of the domestic economy. China’s data release is one of several price-related releases this week.