June Hike on the Table

May 30, 2023 • Estimated Reading Time: 5 minutes

Macro Markets

The big kahuna this week, Payrolls. This will be the big decider for the June FOMC meeting. Inflation has been sticky as PCE surprised upside, and the last payrolls were also sticky. I believe we would need a trend lower on payrolls or a surprise print lower on headline and wage inflation for the Fed to take June off the table. With the debt ceiling off the table, the Fed may be more inclined to hike one final time, given inflation is still acting sticky and labor is still strong.

The data will validate or invalidate the prevailing market sentiment, which is currently one where traders are walking back on dovish Fed expectations since the banking crisis. As you can see from the pricing in the Fed funds futures curve below, what a difference two weeks makes in terms of the outlook.

Just a few weeks ago, traders were still expecting three rate cuts by year-end. Fast forward to today, and the implied rate is still sitting above 5% for December pricing. The higher for longer is still the narrative. A tighter jobs market will help to reaffirm the Fed's hawkish stance with stronger wage data. It will also act as a supportive factor if we see those data points come in above estimates. Either way, labor market conditions are holding up as the economy continues to move along nicely. That will keep the Fed's conviction rather steadfast for the time being.

Friday's US payrolls report will be a pivotal one for stocks. The worst outcome would be rising wages and a weaker job number, which might reverse the growing expectation of a Fed pause in May.

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