The stock market should continue to be subject to two non-economic factors this week: /1/ a pullback in tech stocks, possibly in anticipation of large IPOs and /2/ developments in the Iran war. The macroeconomic background remains supportive. This week's release of the May CPI is expected to show a more subdued Core than in April. And, the May Employment Report points to moderate economic growth with contained wage inflation. The latter keeps open the door for Fed policy easing at some point.
Consensus looks for the run-up in oil prices to continue to impact the May CPI. It expects +0.5% m/m for the Total and 0.3% for Core, which would lift the y/y for both. The risk is for a higher-than-consensus Total and lower-than-consensus Core. However, with oil prices having declined in the past week or so, the market will likely dismiss a high Total. The downside risk to Core comes from /1/ the possibility that Primary and Owners' Equivalent Rent fall back to 0.2% m/m rather than 0.3% after the technical catch-up boosted them to 0.5% in April and /2/ no significant speedup in other components. The lower print should keep the y/y steady at 2.8%.
The May Employment Report implied no need for the Fed to change monetary policy, but it did not close the door for an easing at some point. The contained Average Hourly Earnings should encourage Fed officials to expect price inflation to eventually move down toward their 2% target once the oil and tariff shocks dissipate. And, there may have been less than meets the eye with regard to the jobs growth:
First, although the Report showed a larger-than-expected +172k m/m increase in Nonfarm Payrolls, the increase was narrowly based. Only 3 sectors accounted for most of the gain: Leisure and Hospitality (+70k), Health Care and Social Assistance (+47k), and State Non-Education Government (+44k) -- +161k in total. Most other sectors were little changed. Second, Private Payrolls slowed for the second month in a row, slowing more between April and May than between March and April (-57k versus -25k). The large gains in March and April conceivably could be just a post-winter rebound, and the more moderate May increase could be on a path to a trend-like pace.
Private Payrolls (m/m change, 000s)
Jan Feb Mar Apr May
180 -148 202 177 120
The steady 4.3% Unemployment Rate and trend-like 0.3% m/m Average Hourly Earnings (AHE) support the Fed's view that inflationary pressures are not stemming from the labor market. The moderate pace of wage gains continued to be fairly widespread. Eight of thirteen sectors showed AHE up by 0.3% or less, not much different from the nine in April when AHE overall rose 0.2%. The y/y fell to 3.4% from 3.6%, keeping it line with other measures of labor cost inflation.
Another Report last week underscored the absence of inflation pressures from the labor market. Compensation/Hour -- the broadest measure of labor costs -- was revised down sharply for both Q425 and Q126 (see table below). The downward revisions brought the y/y to 3.3% in Q126. It was 4.3% in Q425 and 4.9% in Q424.
There was some evidence in the May Employment Report supporting the perception that job search by college graduates is difficult. Both Labor Force Participation and Employment fell for people with a college degree in May. The lower Participation could reflect discouragement. The lower Employment shows weak hiring. Nevertheless, Participation fell by more than Employment, so the Unemployment Rate for them dipped to 2.7% from 2.8% in April.
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