How could the latest U.S. and European inflation reports impact monetary policy?
Executive summary:
- U.S. job openings declined to 8.8 million in July, suggesting that the labour market is cooling
- Consumer spending remained robust in the U.S. during July, increasing at a 0.8% clip
- Eurozone inflation remained stubbornly elevated at 5.3%
On the latest edition of Market Week in Review, Director of Investment Strategies, Shailesh Kshatriya, and Equity Manager Research Analyst Michelle Batjargal discussed the current state of the U.S. labour market. They also chatted about how the latest inflation numbers from the U.S. and the eurozone could affect monetary policy.
July JOLTS data suggests cooling in U.S. labour market
Batjargal and Kshatriya began the conversation by digging into the findings from the U.S. Bureau of Labor Statistics' Job Openings and Labour Turnover Survey (JOLTS) for July, which was released on 29 August. Kshatriya explained that because the survey provides a sense of the underlying labour demand in the U.S. economy, it serves as an important indicator for the U.S. Federal Reserve (Fed) as it tries to bring the labour market back into balance.
"Above all, the latest JOLTS numbers show that labour demand is continuing to trend downward, which is good news for the Fed as it attempts to rein in inflation," Kshatriya stated. He said that there were 8.8 million job openings in July slightly less than anticipated and significantly down from the record high of 12 million in March of 2022. However, the current number of job openings is still above the pre-pandemic average of around 7 million, Kshatriya added. "Clearly, there's been a lot of progress made in cooling the labour market, but more work still needs to be done," he remarked.
Another key takeaway from the report was that the number of quits or employees who actively left their jobs fell to 3.5 million in July, Kshatriya said. In addition, the overall quit rate dipped to 2.3%, he noted, matching the pre-pandemic average. "The quit rate is essentially a confidence measure of the labour market. When it drops, it implies the labour market is cooling down, since fewer workers are voluntarily quitting," Kshatriya explained.
He finished by noting that the gold standard for the status of the U.S. labour market the monthly nonfarm payrolls report will be released 1 September. Kshatriya said the consensus is for 150,000 to 170,000 job additions during August, with anything above 200,000 likely to be seen as a hawkish number by the Fed.
Fed's preferred inflation measure still running high
Turning to the latest inflation numbers from the U.S., Kshatriya said that the Fed's preferred inflation gauge the personal consumption expenditures (PCE) price index rose at a headline rate of 3.3% in July on a year-over-year basis. Meanwhile, the core PCE index which excludes prices from the often-volatile food and energy sectors climbed at a 4.2% clip, he noted.
Kshatriya said that both of these numbers were up slightly from June, but well within consensus expectations. "While the latest PCE numbers weren't much of a surprise, bear in mind that an increase of 4.2% is still roughly double the Fed's inflation target rate of 2%," he stated. Kshatriya added that the report also showed that consumer spending remains robust, with household spending rising 0.8% in July the largest increase since January.
Taken all together, he said that the latest PCE report probably means that U.S. monetary policy will remain restrictive for some time. "This doesn't necessarily mean that the Fed will hike rates again, but it probably does suggest that rates will stay at restrictive levels for a while," Kshatriya remarked, noting that borrowing costs are currently at a 22-year high of 5.25%-5.5%.
Eurozone inflation remains elevated while economic growth slows
Switching to Europe, Kshatriya said that inflation remains stubbornly elevated, with headline inflation in the eurozone up 5.3% in August from a year ago. At the same time, more tangible evidence is also emerging that the region's economy is weakening, he noted.
Case-in-point: The latest numbers show that money supply actually contracted in the eurozone during July, Kshatriya said. In addition, he pointed to recent surveys illustrating a weakening in business and consumer confidence in the region.
The whole situation puts the European Central Bank (ECB) in a tricky spot, Kshatriya said. "On the economic front, things are clearly slowing down, but on the inflation front, price pressures are still well above target. Overall, with the ECB focused on lowering inflation to 2%, the latest numbers likely mean that policy rates in the eurozone will stay restrictive for the time being," he concluded.