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08 August 2022
- Friday’s unexpectedly strong U.S. labour market data once again unnerved investors in financial markets and sparked concern from investors that the Federal Reserve would continue its aggressive interest rate hikes to cool the economy and dampen inflation. According to the Labor Department, the U.S. economy added 528,000 nonfarm jobs in July, more than double consensus expectations of around 250,000. May and June estimates were revised up by a combined 28,000. Following the strong July gains, total nonfarm employment in the U.S. has now returned to its pre-pandemic level.
- The unemployment rate ticked down to 3.5%, matching its record low February 2020 level. Wage growth also rose more than expected, 0.5% MoM and 5.2% YoY, so inflation remains the big problem for economy and Fed officials.
- Very strong labour market is a double-edged sword for the Fed. They can continue to hike rates to tackle inflation without causing a sharp increase in the unemployment rate, but the labour market must cool to help ease price pressures. The question of whether the Fed will continue at its current pace and deliver a third straight 75 bps rate hike next month is currently of key importance to investors. However, a number of Fed officials had pushed back against the market’s dovish narrative and signalled that the central bank is still committed to raising rates until inflation is under control.
- Fed Governor Michelle Bowman said Saturday that the Fed should consider more 75 bps rate hikes to bring inflation back in line with the central bank’s target, and there’s also speculation about inter-meeting rate hike if the inflation reports were to surprise to the upside.
What to watch out for this week
- The main highlight this week will come on Wednesday, when the inflation reports from the USA and Germany will be released. Preliminary data on the inflation in Germany point to a second consecutive decline in inflation, but the inflation remains at the 40-year highs of around 7.5%. In the USA, analysts expect the annual rate of inflation to moderate to 8.7% in July, from 9.1% in June. The core CPI is, however, expected to increase by 0.5% MoM, pushing the annual rate up to 6.1%, from 5.9% in June. On Thursday, the Producer price index figures for July will also be released.
- The data on the monthly GDP for June and the preliminary data on the the overall second quarter GDP in the UK will be released on Friday, after the Bank of England warned last week that it expects the economy to enter a 15-month recession later this year.
- The Chicago Fed President Charles Evans, the Minneapolis Fed President Neel Kashkari and the San Francisco Fed President Mary Daly are due to speak in the coming week. Their comments will be closely watched in the context of the expected inflation numbers and the Fed’s next monetary policy move.
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