EMPLOYMENT
Last week it was reported that nonfarm payrolls rose by 206,000 jobs in June, slightly outpacing expectations. However, downward revisions to the previous two months’ reports were dramatic, subtracting 111,000 jobs. The unemployment rate rose from 4.0% to 4.1% while labor force participation rose to 62.6% from 62.5%. Average hourly earnings grew by 0.3% and are up 3.9% year-over-year.
Our Take: The jobs market appears to be softening as job creation slows and the unemployment rate rises. A weaker employment sector makes rate cuts more likely, especially if inflation moderates.
POWELL TESTIMONY
Federal Reserve (Fed) Chairman Powell testified before both the House and the Senate this week. While saying that “considerable progress” has been made toward defeating inflation, Powell also noted that “elevated inflation is not the only risk we face.” Significantly, Powell stated that cutting rates “too late or too little could unduly weaken economic activity and employment.”
Our Take: After making apparent solid progress on the inflation front, the Fed has shifted focus to include the other side of their dual mandate – promoting maximum employment. Powell indicated that the Fed would likely not wait to achieve their 2% inflation target before cutting rates.
INFLATION
The Consumer Price Index (CPI) fell 0.1% in June. The core CPI, excluding food and energy, rose just 0.1%. Year-over-year, consumer prices are up 3.0% while core CPI has risen 3.3%. Producer prices (PPI) were higher than expected in June, rising 0.2% for the month and 2.6% over the past year.
Our Take: Softer employment market, check. A Fed focused on both parts of their dual mandate, check. Moderating inflation, check. All the ingredients for a Fed rate cut appear to be in place. Market participants currently believe the first cut will come in September. Unless economic data reverses by then, they are probably right. However, as evidenced by the surprisingly higher PPI, there is no guarantee that data between now and then will all point in one direction.
MUNICIPALS
S&P Global Ratings affirmed its AA long-term rating on Memphis, Tennessee but revised its outlook from stable to negative. S&P cited “a variety of negative budgetary variances that the city incurred during fiscal 2024” along with “expenditure pressures and a slowing tax base growth.” According to Bloomberg, the city is expected to use $74 million from its general fund balance, well above the budgeted amount of $11.7 million.
Our Take: Memphis has experienced an increase in labor expenses and lower-than-expected property tax revenue collections. In addition, Memphis is expected to lag other Tennessee cities in population and wage growth. The S&P outlook change and increased possibility of a ratings downgrade for Memphis debt represents a cautionary tale to other cities who dip into fund balances to cover budgetary shortfalls rather than addressing their root causes.