The U.S. economy has continued to remain strong, despite a historically steep inverted yield curve which often signals that a recession is on the horizon. The third reading for Q1 US GDP showed a better than anticipated +2.0% annual growth rate, largely fueled by a resilient labor market that remains a strong point of the economy. For example, the U.S. added nearly 500K jobs last month, well over double wall street expectations. At the same time, the Unemployment Rate for June edged lower slightly MoM to 3.6% from 3.7% last month.
However, Inflationary pressures have remained somewhat sticky, with May CPI readings showing a +0.1% uptick. A big part of this is service price inflation, which remains problematic and could trigger further monetary tightening from the Federal Reserve. Many of us have noticed this during the busy summer travel season.
After the Federal Reserve opted for a pause at its last FOMC meeting in June, citing the lag effects of monetary policy. Chair Powell did indicate that future rate hikes were likely and that the battle against inflation is still being waged.
Markets are currently pricing in about an 85% chance of a 25 basis point hike at the next FOMC meeting later in July, while the Dot Plot from the recent meeting suggested a terminal Funds rate of 5.50% to 5.75% by year-end.
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