8/5- Weekly Economic Highlights

The U.S. economy added 528,000 jobs in July, more than double market expectations of 250,000, and job gains were revised up by 28,000 for the prior two months. Trends in employment remain strong, with the three-month moving average payrolls at 437,000 and the six-month moving average at 465,000. Hiring was widespread, led by leisure and hospitality, professional and business services, and healthcare. The unemployment rate dipped to 3.5%, returning to its pre-pandemic level, as the labor participation rate decreased to 62.1% from 62.2% in June. The U-6 underemployment rate, which includes those who are marginally attached to the labor force and employed part time for economic reasons remained steady at 6.7%. Average hourly earnings rose 5.2% in July from 5.1% year-over-year in June, adding to broader inflationary pressures in the economy. The strong July labor report bolsters the case for the Fed to continue raising the federal funds rate.

Meanwhile, the Institute for Supply Management (ISM) manufacturing index dropped to 52.8 in July from 53.0 in June. Readings above 50.0 are indicative of expansion in the manufacturing sector. The decline was largely driven by plunging crude oil and metals input prices. Weakness in new orders for merchandise and rising inventories also contributed to the drop as consumer spending shifts to services. The ISM services index rose to 56.7 in July from 55.3 in June reflecting a pickup in new orders and business activity, indicating expansion for the 26^th consecutive month.

Central banks around the globe are tightening financial conditions to contain inflation. As expected this week, the Bank of England increased the benchmark rate by 0.50% to 1.75%, its highest level since 2008 and the first time since 1995 that the bank has hiked rates more than 0.25%. The Bank forecasted inflation at 9.4 % in June climbing to 13.3% in the fourth quarter and projected a recession beginning in the fourth quarter and lasting through next year. The Bank also indicated they would begin selling assets from the balance sheet in a shift to quantitative tightening in the September timeframe. Also as expected this week, the Reserve Bank of Australia raised its main policy rate by 0.50% to 1.85%, its highest level since 2016.

U.S stocks were mixed this week as the market digested corporate earnings mostly better than feared and a potentially hawkish Federal Reserve. Treasury yields trended higher on hawkish remarks from Fed governors and the robust employment report. The Treasury curve inverted further, with the 2-year at 3.21%, 5-year at 2.96%, and 10-year at 2.84% as of Friday morning. According to Freddie Mac, mortgage rates fell below 5% for the first time in almost four months, as the average for a 30-year fixed loan fell to 4.99% from 5.30% last week. Financial markets remain volatile as the power struggle between inflationary pressures and a slowdown in economic growth weighs on market participants.

Next week’s economic releases will focus on inflationary trends, including the Consumer Price Index (CPI) and the Producer Price Index (PPI), which will further influence the direction of the Federal Reserve’s monetary policy along with today’s labor report. The Fed has a myriad of data to digest before the September 21st meeting; however, the Chandler team expects monetary policy accommodation will continue to be removed until persistent inflation subsides.

Next Week:

NFIB Small Business Optimism Index, Consumer Price Index (CPI), Producer Price Index (PPI), University of Michigan's Sentiment Index, Import Price Index, Export Price Index

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