One of, if not the biggest near-term focuses of the market is whether or not the Federal Reserve will raise its benchmark overnight lending rate, the federal funds rate, at the Fed’s next meeting on June 13-14.
Right now, it is unclear what the Fed will do. A few weeks ago, most investors thought the Fed might be done with its aggressive interest rate hiking campaign, which has raised the federal funds rate from zero to now over 5% in just a little over a year. But now most investors seem to think another rate hike could be coming at the Fed’s June meeting.
Still, the Fed’s next move will likely be influenced by upcoming economic data, and one of those key data points will be released tomorrow. It could be a huge day for the stock market. Here’s why.
May jobs report
Two of the common leading indicators of inflation have been the Consumer Price Index (CPI), which tracks the prices on a market basket of consumer goods, and the labor market. In recent years, consumer prices have been high and unemployment low. Many experts believe the strong labor market has enabled consumers to spend right through the higher prices, which has led inflation to drag on longer than expected.
This year, however, consumer prices have seen their growth start to slow, indicating that inflation is slowing, although inflation still remains far away from the Fed’s 2% target. But interestingly, the labor market hasn’t really budged.
US Consumer Price Index YoY data by YCharts
The Fed’s May meeting minutes said, “Participants generally expressed uncertainty about how much more policy tightening may be appropriate.” The minutes also stated that “… some softening in labor market conditions would be needed to bring aggregate supply and aggregate demand into better balance and reduce inflationary pressures over time.”
So, ideally, if the labor market shows some clear signs of softening and the CPI continues to trend downward, then the Fed may have the proof it needs to end its rate-hiking campaign, which many economists and analysts believe is already poised to tip the U.S. economy into a recession.
At this point, I believe the jobs report may be more important than the CPI. The CPI has fallen consistently this year, and the Federal Reserve Bank of Cleveland’s Nowcasting service expects the CPI to have ended May up 4.12% year over year, which would be another decline from April.
However, estimates from Refinitiv still expect the U.S. economy to have added 195,000 jobs in May and for unemployment to remain at 3.5%. While this is slower job growth, it still indicates a resilient job market, which could be a problem for the Fed.
How to prepare for tomorrow
My guess is if the unemployment rate comes in a little bit higher than 3.5%, the market may view a Fed pause on rates in June as more of a possibility, which may get the stock market moving higher on Friday. I think this will also depend on data from the report that shows what happened with wage growth in May, which can also tell us a lot about the current state of the labor market.
But I would never recommend that investors try to time the market because it’s never clear how investors will interpret certain data. For instance, if the unemployment rate jumps in May, investors may get spooked about the economy slowing too quickly and a perceived imminent recession, which could send stocks lower.
However, being aware of what could happen tomorrow is half the battle. That will allow investors not to panic if there is a big movement one way or the other. Ideally, you should own stocks that you have strong long-term conviction in and that can successfully navigate a number of different environments, which will help you remain calm when the markets are volatile.