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Weakening of Labor Market Could Mark the End of Interest Rate Hikes

Miguel A. Rodriguez
Miguel A. Rodriguez
12 May 2023

The release of the Production Price Index (PPI) showed it has returned to pre-pandemic levels while the initial unemployment claims data, that reached the highest level in 19 months, could be what the Federal Reserve (Fed) has been waiting for to the end its steep rate hiking cycle. 

After the release of the PPI data and the initial unemployment claims yesterday, investors renewed their expectations that the Fed has likely reached the end of the rate hike process due to the possibility of a recession. As a result, treasury bonds continued to rise and the yield on the 2-year bond reached 3.82%.  

In this case, the Nasdaq 100 technology index declined by 0.4%, contributing to a drop in North American indices. The S&P 500 index decreased by 0.75%, while the Dow Jones index increased by 1%.   

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Disney shares, which plummeted 8.5% after the firm lost subscribers to its streaming service, were a major factor in the decline of S&P 500. Alphabet Inc., on the other hand, saw a 4.5% increase when the company released its most recent AI technologies. Due to the superior first-quarter results of technology businesses, which also benefit from the decline in market interest rates, there is still a performance gap between technology equities and the rest of the market

The economic data that was provided yesterday added support to the notion that the labor market is starting to deteriorate and that inflation is clearly on the decline. 

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In contrast to the 2.4% projected and 2.7% last month, the PPI came in at 2.3%, which means the data is now within the pre-pandemic zone. The Consumer Price Index (CPI) figure is still high at 4.9% year-over-year, mostly due to persistently high food and housing inflation. The fall in production costs is thought to have an impact on the CPI data and cause it to trend downward towards the 2% objective. 

A potentially looser labor market is anticipated to result in a decline in domestic demand, which will lower inflation. According to Bank of America, spending on credit and debit cards decreased, particularly among the customer group with higher incomes. 

Initial unemployment claims climbed to their highest level in 19 months (since January 2022), which shows that the Fed’s long-anticipated decline in the labor market has already started. 

 

DMO 12.05.2023 graph.png

 Sources: Bloomberg, Reuters 

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.