The US economy has remained strong despite a historically steep inverted yield curve that often suggests a recession is imminent. The third read for US Q1 GDP showed a better-than-expected annual growth rate of +2.0%, largely due to a resilient labor market, which remains a strong point of the economy. For example, nearly 500,000 new jobs were added in the US last month, well above twice Wall Street’s expectations. At the same time, the unemployment rate in June fell slightly from the previous month to 3.6% compared to 3.7% in the previous month.
However, inflationary pressures remained somewhat persistent, with May CPI readings showing an increase of +0.1%. Much of this is due to service price inflation, which remains a concern and could trigger further monetary tightening by the Federal Reserve. Many of us have noticed this during the busy summer travel season.
After the Federal Reserve decided to pause at its last FOMC meeting in June, citing the lagging effects of monetary policy. Chairman Powell indicated that future rate hikes were likely and that the fight against inflation was still ongoing.
Markets are currently pricing in around an 85% chance of a 25 basis point hike at the next FOMC meeting later in July, while the dot plot from the most recent meeting suggested a final rate of 5.50% to 5.75% by year-end .
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