The US Employment Cost Index for the second quarter of 2025 rose by 0.9%, exceeding the expected growth of 0.8%. During the same period, wages increased by 1.0% quarterly, up from 0.8% before. Benefits saw a quarterly rise of 0.7%, down from the previous growth of 1.2%. This report is the best source for tracking wage growth, but it is released quarterly, unlike the more frequent Average Hourly Earnings data.

Federal Reserve Monitoring

The Federal Reserve pays close attention to this data to evaluate economic conditions in the labor market. Recent figures indicate some acceleration in wage growth, but benefits are not keeping up. Today’s Q2 Employment Cost Index data was stronger than expected, showing a 0.9% increase. Although benefits costs slowed, wages rose to 1.0% for the quarter. This suggests that wage pressures in the economy are not easing as quickly as desired. The Federal Reserve now faces a tougher challenge, as this data indicates inflation may remain high. This report follows the June 2025 CPI data, which showed core inflation stubbornly around 3.2%, well above the Fed’s target. With the Fed funds rate at 5.25%, this wage data dims the chances of a rate cut later this year. For derivative traders, this changes the outlook on future Fed policy in the coming weeks. It might be wise to position for interest rates to stay high longer, which could involve selling September or December SOFR futures contracts. Following this release, the market reacted, pushing the 2-year Treasury yield up 10 basis points.

Impact on Equity and Currency Markets

In equity markets, continued wage pressure could hinder corporate profits and stock valuations. We can expect more volatility, so buying VIX call options for August or September could be a smart hedge. Protective put options on interest-rate-sensitive indices like the Nasdaq 100 are now more appealing than they were yesterday. This scenario is also positive for the US dollar, as a more hawkish Fed increases the interest rate gap with other central banks. We can expect the dollar to strengthen against currencies like the Euro and the Yen. This reflects the trend we saw in 2023 when strong economic data consistently boosted the dollar. Looking ahead, all eyes will be on next week’s August jobs report. The market will closely examine the Average Hourly Earnings figure for signs that this ECI strength is continuing. A strong AHE figure would support this hawkish outlook and likely enhance these trading trends. Create your live VT Markets account and start trading now.

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