Executive summary:
- U.S. consumer prices rose at a 3.2% annual clip in July
- U.S. job gains in July marked a cooldown from earlier in the year
- Moody’s placed six major U.S. lenders on a downgrade watch list
On the latest edition of Market Week in Review, Director of Client Investment Strategies, Mark Eibel, and ESG and Active Ownership Analyst Zoe Warganz discussed the latest U.S. inflation data as well as the country’s employment report for July. They also chatted about recent actions taken by Moody’s, including placing six major U.S. lenders on a downgrade watch list.
U.S. core inflation rises 0.2% on monthly basis
Warganz opened the conversation with a look at the latest U.S. consumer price index (CPI) reading from the Bureau of Labor Statistics. She said that headline inflation for July increased at a rate of 3.2% on a year-over-year basis—a number that matched consensus expectations and was far below the 9.1% gain seen a little over a year ago.
“July’s 3.2% reading is a good number, particularly for the U.S. Federal Reserve (Fed), as it points to continued progress by the central bank in its fight against inflation,” Eibel stated. He said that of even more significance was the fact that core inflation only rose 0.2% from June to July, marking the second-consecutive month of just a 0.2% increase in core CPI. “If you take this number and repeat it 12 times in a row, inflation would be roughly around 2.5%—which is pretty close to where the Fed would like it to be,” Eibel remarked.
He said that the July inflation report could mean that the U.S. central bank might skip a rate increase at its next meeting in mid-September. Because the Sept. 19-20 meeting is still six weeks away, Fed officials will also be able to review the CPI report for August before making any decisions on rates, Eibel noted. He added that markets were also pleased by the July numbers, with the benchmark S&P 500® Index rising sharply shortly after the report was released on Aug. 10.
Is July’s U.S. jobs report good news for the Fed?
Turning to the U.S. labor market, Warganz asked Eibel if the July employment report, published Aug. 4, was also a positive for the Fed. “I’d say yes. Between that and the inflation report, the Fed is probably 2-for-2 in the good-news camp,” Eibel said, explaining that the U.S. economy added 187,000 nonfarm payrolls during the month of July. That number was smaller than some of the loftier gains seen in late 2022 and early 2023, he noted, demonstrating that the Fed’s aggressive rate-hiking campaign might be starting to cool the labor market down more.
However, wage pressures remained elevated in the July report, Eibel said, with average hourly earnings up 4.4% on a year-over-year basis. This is likely to remain a key watch point moving forward, he noted, as it suggests that the U.S. labor market is still robust.
At the end of the day, though, the overall July employment numbers were likely well received by the Fed, Eibel said, noting that markets reacted favorably to the report as well. “This was particularly the case on Aug. 7—the first full trading day after the report was published—when the market had more time to process the details,” he remarked.
Markets react negatively to Moody’s downgrade of U.S. banks
Warganz and Eibel wrapped up their conversation by discussing the recent actions taken by Moody’s. Eibel explained that late on Aug. 7, the credit-ratings agency lowered the ratings of 10 small- and medium-sized U.S. banks, while also placing six major U.S. lenders on a downgrade watch list.
“I’d put this announcement squarely in the negative-news camp,” Eibel said, explaining that the commercial real estate sector—which smaller banks are more exposed to—remains a concern for investors. Similar to how markets reacted following the Aug. 1 downgrade in U.S. government debt by Fitch Ratings, equities also slumped in the wake of the Moody’s news, he noted.
“The announcement by Moody’s was clearly sobering news for markets—the opposite of the good vibes investors received from the July inflation and employment reports,” Eibel stated. He said this shows that markets are currently being driven by whatever the most recent data report or announcement reveals. Eibel added that he expects this to continue for a while—perhaps until fall begins in the Northern Hemisphere, due to the lower trading volumes that are typical during summertime in the U.S.
“The bottom line, however, is that there’s been more good news than bad news in recent days for markets. Overall, we’re 2-for-3 on the good-news front,” he concluded.
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