Athitat Shinagowin/iStock via Getty Images The stock markets will start the week ahead by pricing in the disappointingly strong May job growth data on Friday. Ordinary people would prefer an economy that added jobs, while stocks want it to fall so that the Central Bank cuts interest rates. Investors have two more economic considerations on the way. On Wednesday morning, the BLS will report May 2024 inflation levels. In my preview report, I expect an increase in apparel, no change in food prices, and a decline in automotive goods. At 2 p.m. that afternoon, the Federal Open Market Committee (“FOMC”) will issue its statement and announce its monetary policy rate decision. Ahead of this meeting, the CME FedWatch Tool lowered its probability of an interest rate cut after both the June and July Fed meetings. Although markets expect higher interest rates for longer, what insight should readers expect from the FOMC next week? Furthermore, in September, the Fedwatch tool indicated an increased probability that interest rates will not change. Odds increased from 31.3% on June 6, 2024 to 51%. Readers should once again watch the U.S. Treasury yield after the meeting. Yields are nearly the same from a month ago. They are above 5.0% in the short term and are generally lower for those maturing in two years (US2Y) or later. Seeking Alpha The FOMC might offer investors five insights for stock markets. 1/ Insight on May 2024 Job Growth In May, nonfarm payrolls increased by 272,000. Markets expected the economy to add 182,000. Health care added 68,000 jobs in May. The government resumed its hiring by adding 43,000. Employment in leisure and hospitality added 42,000 in the month, while food services and drinking places hired 25,000. Among the areas of job growth, readers should discount the government job data. It is partially correlated to fiscal policy, which also adds pressure to inflation. Governments use such fiscal funds to hire public service workers. In turn, it strengthens the employment report. The FOMC might subtract those jobs to evaluate the effectiveness of its monetary policy. More importantly, the bank would want the economy to add jobs to the supply side of production. Since inflation is demand-driven and supply-constrained, that eases inflation because jobs added to production would increase supply. For stock ideas, in light of rising government jobs, investors should continue to invest in the defense industry. RTX (RTX), for example, closed at an all-time high. The FOMC may comment on the ambiguity of the unemployment rate rising to 4.0%, the highest level in two years. Conversely, the labor force participation rate fell from 62.7% in April to 62.5% in May, with the prime-age labor force participation rate at the highest since May 2002. Yet the BLS reported that jobs approximately doubled. Seeking Alpha In the May 1, 2024 press release, the FOMC said that job gains remained strong and the unemployment rate remained low. Since job growth strengthened last month, the Committee should expect a low impact on employment by holding its current Fed Funds rate of 5.25% to 5.50%. It will repeat its statement that monetary policy is at a better balance of achieving its employment and inflation goals. 2/Insight on Core Personal Consumption Expenditures Price Index The Fed will comment on the PCE Price Index, which excludes food and energy. This increased by 2.8% in April and is nearly consistent with the previous three months. Change From Month One Year Ago April 2024 2.80% March 2024 2.80% February 2024 2.80% January 2024 2.90% Click to enlarge Data from https://www.bea.gov/ The Fed prefers this index since it excludes food and energy. By stripping out the volatile price changes, the Federal Reserve will see persistently high inflation above its 2.0% target rate. The Fed will comment on the prices for services, which increased by 3.9%, as the primary contributor to the index. By comparison, the price of goods increased by 0.1%. 3/ Timing of Interest Rate Cuts Markets at first brushed off the strong job report on Friday by rallying in the morning. By the early afternoon, selling volume accelerated. The Nasdaq (QQQ) still closed the week rising 2.72% higher. Conversely, the Russell 2000 (IWM) lost 1.17% on Friday and is down 2.22% for the week. Small businesses are more sensitive to interest rate levels. This group will not care about interest rates staying the same in June. Instead, it will listen to changes in the FOMC’s policy statement and Fed Chair Powell’s choice of words at the question-and-answer session. The Fed and the stock market will also react to the CPI report next Wednesday morning. The report needs to demonstrate that inflation is on a firm downward path toward 2.0%. In a less likely scenario, a hot May CPI report would revive fears that the Fed would raise interest rates. Still, the Fed Chair is unlikely to suggest that the central bank is changing its wait-and-see policy. Since last September 2023, the Fed hinted at a rate pause and several rate cuts. An abrupt reversal in its policy might shake market bullishness. 4/ Commentary on GameStop, Meme Stocks, and Speculation The media might ask Fed Chair Powell about the rampant stock speculation in companies like GameStop (GME) and AMC Entertainment (AMC). Expect Powell to dismiss the relevance of two failed businesses on monetary policy. Besides, GME stock’s trading range of between $9.95 – $65.00 is a matter for the Securities and Exchange Commission. The valuation of both firms will adjust downward as their executives take advantage of the market’s folly and their stock surge by selling shares to retail investors. GameStop took advantage of the market’s blind optimism by selling shares twice. The firm filed to sell up to 75 million shares on June 7. On May 24, it sold 45 million shares to raise $933.4 million. Trump Media (DJT) is another example of extreme speculation. It posted revenue of $770,500 and an adjusted EBITDA loss of $12.1 million. Yet the firm has a market capitalization of $7.88 billion. The stock market needs more than higher rates to tighten financial credit conditions. Until then, stocks with unusual valuations are an isolated dynamic among speculators and short-sellers. In that scenario, the companies are effectively the “house” in a casino. The house almost always wins. 5/ Bond Yields U.S. Treasury yields increased on Friday after the strong jobs report. It may spike again after the inflation report. Wednesday’s FOMC statement should influence bond yield prices the most. In last month’s press release, the Committee said that it would “slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion.“ It also said that it would “maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion.” In the last month, the 20+ Year Treasury Bond (TLT) gained 0.84%, compared to a 0.18% gain in the 7-10 Year (IEF). Data by YCharts Your Takeaway Stocks will not find their direction until after the FOMC’s meeting. Markets already expect interest rates to stay the same. This will hurt the Euro (FXE) and Canadian Dollar (FXC) over the next few months. That benefits the U.S. economy, lowering the cost of imports. Expect trading volumes for speculative stocks to continue. Long-term investors should ignore that noise. Instead, unchanging interest rates increase the attractiveness of short-term bonds (SGOV). It also builds the case of taking profits from frothy sectors, like the Nasdaq (QQQ) and S&P 500 (SP500).