Inflation data, concerns about 'a hard landing later': What to know this week

8 min read

A series of inflation reports due out this week could propel or break the market’s summer momentum.

Investors will get the latest gauge of how quickly prices are rising across the U.S. economy from three releases on tap in the coming days: PPI, CPI, and unit labor costs.

The readings are expected to influence how Federal Reserve officials proceed with the rate hiking cycle and will be closely monitored after Friday’s monster employment report suggested more aggressive increases may be warranted to slow the economy.

The U.S. economy added 528,000 jobs in July, according to the Labor Department — a figure over twice as high as economists anticipated amid expectations job growth would recede as tighter monetary conditions and company layoffs stoked fears of a recession.

Moreover, the figure marked the labor market’s full recovery to its pre-pandemic level.

For investors, the report implied labor conditions remained strong enough for the Federal Reserve to keep raising interest rates.

Stocks finished mixed on Friday as investors mulled the report. The tech-heavy Nasdaq fell 0.5% and the S&P 500 ticked down 0.2% while the Dow rose by 0.2%.

Economists at Bank of America called the report “a double-edged sword,” implying lower recession risk but an increased risk of a hard landing later.

"The July employment report was an absolute knock-out, a major upside surprise relative to my expectations and indeed much of the labor market data released up to this point,” Renaissance Macro Research Head of U.S. Economics Neil Dutta wrote in a note. “Talk of recession and a monetary policy pivot is premature.”

He added that "this jobs report is consistent with an inflationary boom. The Fed has a lot more work to do and in an odd way, that the Fed needs to get more aggressive in pushing up rates, makes the hard-landing scenario more likely."

The labor market’s unusual tightness has been a focal point of Fed officials, with the imbalance between job openings and available workers placing upward pressure on wages and exacerbating inflationary pressures.

The labor force participation edged marginally lower last month, falling to 62.1% from 62.2% in June. Average hourly earnings, meanwhile, increased 0.5% for the month, higher than June’s upwardly revised monthly wage gains of 0.4%. On an annual basis, earnings were up 5.2%, on par with June's year-over year increase.

U.S. Federal Reserve Chair Jerome Powell attends a press conference in Washington, D.C., the United States, on July 27, 2022. The U.S. Federal Reserve on Wednesday raised its benchmark interest rate by 75 basis points, the second in a row of that magnitude, as elevated inflation showed no clear sign of easing. (Photo by Liu Jie/Xinhua via Getty Images)
U.S. Federal Reserve Chair Jerome Powell attends a press conference in Washington, D.C., the United States, on July 27, 2022. (Photo by Liu Jie/Xinhua via Getty Images) · Xinhua News Agency via Getty Images

Pantheon Macroeconomics Chief Economist Ian Shepherdson pointed out that labor force participation has stalled, with the rate for men falling markedly for reasons not yet clear.

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