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Key Points for the Week
The Fed is focused on calming inflation. At a June press conference, Fed Chair Jerome Powell said:
We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses. The economy and the country have been through a lot over the past two and a half years and have proved resilient. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.
Jerome Powell, Fed Chair
To calm inflation, the Fed has tightened monetary policy, taking steps that include raising the federal funds target rate by 1.5 percent from March through June of this year. Raising the fed funds rate pushes interest rates higher so borrowing costs go up. Increased borrowing costs reduce business and consumer spending. Lower spending slows economic growth which reduces the price pressure on goods and services.
According to data released last week, the United States economy is slowing but remains quite strong. The data showed:
…the jobs report, in particular, might not have been as good as it looked. While the establishment number was very strong, the household survey showed a loss of 300,000 jobs, while the unemployment rate remained unchanged at 3.6% only because the workforce shrank. At the same time, average hourly earnings increased by a mere 0.3% in June from May’s level, lower than the rate of inflation.
Ben Levisohn, Barron’s
Last week, major U.S. stock indices moved higher, according to Barron’s, while Treasury bonds lost value as yields moved higher across the yield curve.
Positive jobs data supported the market last week. The U.S. establishment survey indicated 372,000 new jobs were created in June. The rally was broad-based as every sector added jobs last month except for the governmental sector. Health care, professional and business services, and leisure and hospitality marked the highest gains.
The household survey indicated the number of people reentering the labor force is slowing. The participation rate dropped slightly last month and seems to have leveled out after steady increases through the post-pandemic recovery. This trend confirms our view that the pandemic caused some people to retire early or exit the labor force for other reasons. Unemployment remained at 3.6%, and average hourly earnings climbed 5.1%. Non-managerial workers’ wages are rising most rapidly. They are 12.6% higher than one year ago and rose 1.0% last month.
The Job Openings Labor Turnover Survey (JOLTS) indicates companies are pulling back unfilled job applications at a slow rate despite interest rate hikes designed to slow the economy. Job openings dropped 427,000 in May as declines in manufacturing and professional and business services eased demand. The Federal Reserve may have preferred further reductions in labor demand as an indication that inflation pressures are declining.
The S&P 500 recovered 2.0% last week, supported by the strong jobs data. The MSCI ACWI added as well while the Bloomberg Aggregate Bond Index reversed recent gains. The Consumer Price Index leads a busy list of data releases this week as earnings season accelerates.
Good news for workers increases the likelihood that the Federal Reserve will raise rates 0.75% at its meeting in late July. Last week, the government released three major job reports, and all three pointed to ongoing strength in the labor market. The June establishment report indicated the economy continues to produce a large number of jobs. The household survey shows the COVID-driven reassessment of life has cemented a reprioritization of work that has caused some to leave the labor force. The JOLTS data show openings are headed lower, but not fast enough for the Fed to slow its plan for higher rates.
Jobs growth was robust in June. Payroll data indicated the U.S. added 372,000 jobs, beating expectations by nearly 100,000. Previous months were revised lower by 74,000. Even counting the revisions, job growth was higher than expected. It has also been consistent the last four months, which all produced between 350,000 and 400,000 jobs. That means new job entrants are finding jobs relatively easily and more people are returning to positions. With the gains, 98% of the jobs lost in March and April of 2020 have now been recovered.
The underlying data showed broad labor market strength. Every major private sector industry added jobs, with health care and leisure and hospitality producing the most. Manufacturing added 29,000 jobs and now employs more people than before the pandemic. Government employment, which is often affected by educational hiring, was the only sector that lost jobs.
The household survey showed similar trends. Unemployment held steady at 3.6%. The household survey suggested employment and the labor force both shrunk. Fewer households working pushed the participation rate down to 62.2%, well short of the pre-crisis level of 63.4%. After a steady number of people rejoined the labor force as the economy reopened, the participation rate has stalled at about 1% below pre-pandemic highs.
The JOLTS report for May was also released last week. Job openings fell 427,000 to 11.3 million, which was 200,000 higher than expectations. Manufacturing and professional and business services declined 208,000 and 325,000, respectively. The ratio of job openings to unemployed workers declined to 1.89. The Fed would like to see excess demand for labor decline, and the large quantity of open positions suggests this isn’t happening very quickly.
Minutes from its most recent meeting suggest the strong jobs data will support the hawkish Fed raising rates 0.75% later this month. The Fed is concerned about its credibility and looks intent on suppressing inflation quickly. In its minutes, the Fed noted, “many participants saying that a significant risk now facing the Committee was that elevated inflation could become entrenched if the public began to question the resolve of the Committee to adjust the stance of policy as warranted.”
Last week’s releases leave us better off than a week ago because the economy looks more capable of weathering increased interest rates without triggering a recession. The Fed’s path to taming inflation while avoiding a recession is still narrow, just a little wider than it was before.
There are lots of amazing places to retire in the United States but retiring elsewhere can be an attractive alternative. Some countries offer incentives to Americans who retire abroad, reported Laura Kiniry of Condé Nast Traveler (CNT).
Small towns in countries like France, Spain, and Italy, for example, sell off fixer-upper homes for one euro to attract foreign investments; other places are more directly trying to tempt retirees and pensioners looking to relocate, with visas that promise tax cuts, and steep-discount programs that make U.S. dollars go a long way.
Laura Kiniry, Condé Nast Traveler
Every year, the International Living Retirement Index identifies “locations where retirees can spend less money, live happily and healthily, and experience a new country without straying too far from all that is familiar,” reported Caitlin Morton of CNT. For 2022, top destinations include Panama, Costa Rica, Mexico, Portugal and Colombia.
If you’re considering retiring overseas, plan carefully. In addition to visiting and researching your retirement destination, make sure you work with experts who understand:
If you retired overseas, where would you settle?
July 12, 1862: Medal of Honor Created
On July 12, 1862, President Abraham Lincoln signed into law a measure calling for the awarding of a U.S. Army Medal of Honor, the highest and most prestigious military decoration. The medal is given by the president of the United States, but is presented “in the name of the United States Congress.”
In 1863, the Medal of Honor was made a permanent military decoration available to all members, including commissioned officers, of the U.S. military. It is conferred upon those who have distinguished themselves in actual combat at risk of life beyond the call of duty.
Nothing travels faster than the speed of light, with the possible exception of bad news, which obeys its own laws.
Douglas Adams, Author
Life isn’t about finding yourself, or finding anything. Life is about creating yourself and creating things.
Bob Dylan, Singer-Songwriter
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The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as "The Dow" is an index used to measure the daily stock price movements of 30 large, publicly owned U.S. companies. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system.
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