Following the release of the June jobs report, which revealed a slight cooling in the labour market while maintaining its strong stance, investors are eagerly awaiting a key inflation report scheduled for Wednesday. However, the results of the CPI report are likely to have limited impact on the Federal Reserve’s interest rate trajectory.

In June, the labour market added 209,000 jobs, falling short of economists’ projections for a gain of 225,000 jobs. Although this represents the smallest monthly increase since a decline in December 2020, it is important to note that the jobs market remains robust. Average hourly earnings growth remained steady at 0.4% from May, and a year-over-year at 4.4%, indicating persistent wage inflation, while the unemployment rate dropped from 3.7% to 3.6%.

During their June meeting, Federal Reserve officials decided to leave interest rates on hold, opting for a temporary pause to evaluate the impact of the ten previous rate hikes. They emphasized that this brief pause would allow the committee to carefully assess the effects of the aggressive hiking, totalling 5 percentage points, which is the most substantial since the early 1980s. The minutes from the Federal Open Market Committee’s recent meeting indicated that nearly all Fed officials believed that further interest rate hikes might be necessary to address the inflation risks and the tight labour market.

The release of the non-farm payrolls report has reinforced the market’s expectation that the Federal Reserve will resume its rate hikes. As a result, traders overwhelmingly anticipate a 25-basis point rate hike at the upcoming July meeting, with the CME FedWatch Tool indicating a probability of approximately 92%.

This week, market focus turns to the release of June inflation data in the United States. Wednesday’s CPI report is expected to show a 3.1% annual increase in the underlying inflation, marking the slowest rise since March 2021, while core CPI is expected to decline to 5.0% from 5.3% in May.

Furthermore, the second quarter earnings season kicks off in full swing, with financial behemoths BlackRock, JPMorgan Chase, Citigroup, and Wells Fargo reporting their results this week. Earnings will be closely watched as disappointing results from the big lenders would underscore a deterioration in the sector’s outlook; however, corporate America is in a good position to meet the low bar set by consensus. If companies fail to meet expectations, it could leave U.S. equities vulnerable due to the expanding equity valuations witnessed this year.

Source: TradingView

The benchmark equity index has started trading in the red last week with a slowdown in momentum evident on the daily chart. The marginally higher high and the formation of a bearish divergence between the index and the Relative Strength Index indicator shows that momentum is deteriorating. However, until minor support of 4,328 is broken the divergence is not confirmed and a deeper pull back might not unfold. Should support gets breached in the short-term a decline to the 4,100 – 4,200 area could unfold in the coming weeks.

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