Overview: Two of the biggest economic reports of the month were released over the past week. The labor market data was weaker than expected overall, while core inflation was higher than forecasted. These results were roughly offsetting, and mortgage rates ended the week with little change.
While the headline figure in the monthly Employment Report was surprisingly strong, the other major components of the report revealed unanticipated weakness. The economy added 275,000 jobs in February, well above the consensus forecast of 200,000. The largest increases were seen in the healthcare, government, and restaurant/hospitality sectors. However, the results for prior months were revised lower by a massive 167,000, offsetting most of the gains in February. The unemployment rate unexpectedly rose to 3.9%, up from 3.4% in April 2023, which was the highest reading since January 2022. Average hourly earnings, an indicator of wage growth, were 4.3% higher than a year ago and below the consensus forecast.
The Consumer Price Index (CPI) is one of the most widely followed inflation indicators. To reduce short-term volatility and get a better sense of the underlying inflation trend, investors typically look at core CPI, which excludes the food and energy components. In February, core CPI rose 0.4% from January, above the consensus forecast and 3.8% higher than a year ago. Although the core CPI annual rate has fallen from a peak of 6.6% in September 2022, it is still far above the readings around 2% seen early in 2021, which is the stated target level of the Federal Reserve. Shelter (housing) costs remained elevated and again were responsible for the largest portion of the increase. Other categories with large monthly gains included airline fares, apparel, used vehicles, and auto insurance.
Due to the inflation data and recent comments from Fed officials, expectations for a reduction in the federal funds rate have been pushed out until later in the year. While some investors not long ago were saying that the first rate cut would be seen at the Fed meeting next week, most now anticipate that it will not take place until June or July.
Core CPI (annual % change)
Week Ahead
Mar. 14
Retail Sales report
Mar. 19
New Residential Construction report (also known as Housing Starts)
Mar. 20
Federal Reserve meeting
Mar. 21
Existing-Home Sales report