Daily Brief - Fed's Rate Cut Plan in Limbo

TLDR: U.S. job growth surged in May, throwing a wrench in the Federal Reserve’s plans (and the market's hope) to start cutting interest rates.

Despite a slight uptick in unemployment to 4.0% from April's 3.9%, the job market is still buzzing. The Labor Department reported a hefty 272,000 increase in nonfarm payrolls, well above the 185,000 forecast by economists.

This unexpected job boom has kept the Fed cautious about lowering rates, with the central bank likely holding steady next week in the 5.25%-5.50% range.

Even with revisions showing 15,000 fewer jobs in March and April, the robust May figures suggest the labor market remains resilient. The Fed, eyeing a delicate balance, is wary of overcooling the economy in its bid to tame inflation back to its 2% target.

Signs of loosening are emerging, though. April saw a drop in job openings, reaching the lowest level per job-seeker since June 2021, and overall economic output grew at the slowest pace in nearly two years.

Scenario Spotlight: Rocky days ahead

The chart above shows the historical performance of the S&P 500, post the past 5 episodes when the US 10Y jumped 13 bps in 1 day and crossed above 4.4%.

Market Movers: Response from S&P sectors

Here is the historical 1 month response from S&P sectors post a jump in 10Y yields:

Top 3 Performing Assets:

1. S&P Technology: 5.25%
2. S&P Consumer Discretionary: 2.51%
3. S&P Energy: 2.17% Bottom 3 Performing Assets:
4. S&P Financials: -1.09%
5. S&P Telecom: -0.61%
6. S&P Real Estate: 0.22%

Coming up: Action packed week of economic events

Keep an eye on next week's key market-moving events: the June FOMC decision on Wednesday, the release of the Consumer Price Index (CPI) on Wednesday, and the Producer Price Index (PPI) on Thursday.

In April, inflation eased slightly, offering some relief for consumers. However, it remains above the levels that would prompt an immediate interest rate cut. Conversely, wholesale prices surged more than expected in April, presenting another potential obstacle to imminent interest rate reductions.

Futures indicate the Fed will hold rates steady over the next two meetings, with the majority believing we could see the first rate cut by September.