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Inside the Broker - A look-ahead to this week’s Non-Farm Payrolls


Inside the Broker

A look-ahead to this week’s Non-Farm Payrolls

In last week’s ‘Inside the Broker’ blog we took a close look at the outcome of the US Federal Reserve’s latest monetary policy meeting. This included an update to the FOMC’s (Federal Open Market Committee) quarterly Summary of Economic Projections. The key takeaway from the accompanying statement and the Summary was that the US central bank has undergone a hawkish shift. A majority on the FOMC now expect two 25 basis point rises in 2023. Back in March, the forecast was that there would be no rate hikes until 2024. This shift in attitude led to a sell-off in risk assets which was exacerbated after James Bullard, the President of the St. Louis Federal Reserve Bank (although not currently a voting member of the FOMC) suggested that committee members were merely softening up investors and that the first hike since December 2018 could come as early as next year. Following the sharp sell-off in response to this news, equity markets recovered last week with some sharp gains that saw both the S&P 500 and NASDAQ 100 post fresh all-time highs.

Inflation shows up

The reason for the Fed’s hawkish shift is down to the sharp pick-up in US inflation over the past few months. First it was a jump in the Consumer Price Index (CPI) for March. But last Friday saw Core PCE (Personal Consumption Expenditures), the Fed’s preferred inflation measure, hit a multi-decade high in May. This is important because Core PCE is the lowest inflation measure the US government makes public. It is also Core PCE which the Fed uses for its 2% inflation target. It’s currently running at 3.4%. Now the Fed insists this doesn’t really matter as all the inflation we’re now seeing is transitory, that is, it will soon disappear. But the central bank hasn’t really explained how soon is soon, and it appears to be having an internal debate on the subject. One thing is for sure, the FOMC in much more worried about inflation now than it was in March.

Dual mandate

The Federal Reserve has a dual mandate, that is ensuring price stability (steady inflation) while maximising employment. It is the latter part of this mandate that is, in the eyes of most Fed watchers, currently persuading the central bank from moving sooner on rate hikes. This means that the monthly US Non-Farm Payroll release has regained its importance in the economic calendar. As the US lockdown unwinds, the data is making more sense as the volatile pandemic effects recede. But despite some bright flash points, this year’s payroll data has been a disappointment. Notably, in April forecasters were looking for a payroll increase of one million, only to see job gains of just 266,000 and a sharp downward revision to the prior month’s data. Overall, there were over 21.5 million jobs lost at the start of the pandemic with 11.1 million made back so far. That leaves a substantial shortfall of over 10 million. The Federal Reserve has made it clear it wants to get back to a pre-pandemic levels, even though the unemployment rate back then was the lowest in over 50 years. The thinking is that they won’t be able to do this while raising interest rates, even if inflation does prove to be more persistent than currently envisaged.

Friday’s numbers

The consensus expectation is that this Friday we’ll see Non-Farm Payrolls for June show an increase of 700,000. So, nothing dramatic, but hopefully more than the prior month’s reading of 559,000. The big question is how the markets could react to a different number. As things stand, and assuming there aren’t any large revisions to the previous month’s data, it’s fair to assume that equity markets will be quite relaxed about a lower number. It may not be good for the US economy, but a disappointing payroll figure will help convince investors that the Federal Reserve will delay its first post-pandemic rate hike. That would suggest that a strong number would be negative for the major US stock indices, at least in the short-term. But I must emphasise, this is simply speculation, and the initial market reaction to any data release can easily wrong-foot traders.

Smart News

Sometimes it can be difficult to keep up with all the latest financial events and releases. But our Smart News widget can really help you follow everything that happens. It will certainly report Fridays’ Non-Farm Payroll numbers within seconds of their release, and expert analysis will be available soon after. Smart News is available to all Trade Nation live account holders and includes curated news feeds from social media designed to keep you one step ahead of the regular financial press.

 

 


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