The US labour market created 372K new jobs in June, close to the rate of growth in the previous three months when growth was 398K, 368K and 384K. The data came out better than expectations, which suggested a slowdown to 260K–290K. The rate of wage growth in the same month a year earlier slowed to 5.1% in June after peaking at 5.6% in March. Fed officials in the last couple of days have hinted to markets that the rate could be raised again by 75 points at the end of July, as monetary officials prefer to bring the gap between projected inflation and the Fed Funds rate closer to zero before the end of the year. A strong labour market is likely to strengthen the Fed in its intentions. At least that is what the market thinks, having priced in a rate hike of 75 points later this month. Interestingly, the stronger-than-expected report did not cause the Dollar to strengthen. It is more likely that the markets are “selling the fact” as the Dollar has already broken several records this week.  At the same time, investors and traders should be prepared that market participants may soon return to active Dollar buying due to carry-trade and a more optimistic outlook for the US economy than most developed countries.

The US Bureau of Labor (sic) Statistics usually releases its Non-Farm Payroll (NFP) report on the first Friday of each month. But occasionally, like now, it’s the second Friday. So, we have to wait until the 8th July to get the latest update. Historically, the NFP is considered the most important data release of each month. It is the most extensive employment measure of the world’s biggest economy, so is considered a strong indicator of global economic health, even though it is backward-looking. It’s important to traders as it can often lead to dramatic market movements, particularly if the release is significantly outside market expectations. Payrolls versus inflation But we have seen a marked shift in attitude towards the Non-Farm Payroll data. This has been particularly noticeable over the last year and a half, as we move further away from the chaotic month-on-month payroll changes we saw as the pandemic took hold. The NFP release has lost its ranking as the top monthly data release. Instead, it is inflation numbers, particularly the Consumer Price Index (CPI) and Core Personal Consumption Expenditures (PCE) that now engage traders and commentators alike. Dual mandate The US Federal Reserve has a dual mandate. One part is to maximise employment and the other is to work to ensure financial stability. The former requires no explanation, but the latter is all about controlling inflation. The Federal Reserve has a 2% inflation target, as measured by Core Personal Consumption Expenditures. Core PCE differs from Core CPI in that it only measures goods and services targeted towards and consumed by individuals. It tends to understate inflation when compared to the CPI data. But most investors focus on CPI, even when considering the Fed’s 2% target.  Record lows Back in 2020, as governments around the world responded to the coronavirus by locking down the global economy, the US lost over 21.5 million NFP jobs in just two months. Since then, there’s been a relatively steady increase in payrolls. While still just over a million short of making back all those lost jobs, the Unemployment Rate stands at 3.6%. That is just 0.1% above the pre-pandemic level, which was itself close to a 50-year low. For now, at least, employment isn’t the issue. Inflation is. We’re already experiencing soaring prices and a cost-of-living crisis, leading directly to a fall in demand. Consumption is estimated to account for around 70% of US economic activity when measured by GDP. Put a dent in this and companies will lay off workers. The government loses tax revenues while benefit payments rise, and the jobless cut back on spending. Corporations cut more staff, and a downward spiral takes hold within a recessionary environment.  Inflation and monetary policy Headline year-on-year CPI stood at 1.5% in March 2020. It dropped to +0.1% in May, its lowest in just under five years, before pushing higher. By May 2021 it stood at 5.0%, well above the 2% target, as members of the US Federal Reserve insisted it was transitory and nothing to worry about. Last month it reversed a small decline to hit 8.6%, its highest level in forty years. The fear is that it has yet to peak. This has forced the US central bank to switch to an unexpectedly aggressive pace of monetary tightening. Just to give some perspective, between the beginning of 2016 and December 2018, the Federal Reserve raised rates to 2.5% from below 0.25%. By the summer of 2019 it was reversing course, cutting rates until the Fed Funds was back below 0.25% by April 2020. It began raising rates in March this year and has continued at each meeting since, taking the Fed Funds rate up to an upper limit of 1.75%. The Fed is expected to raise rates to 2.5% at its July meeting, with the terminal rate expected to be between 3.5 and 4.0%, possibly by year-end. This tightening is having a devastating impact on equity and bond prices. The S&P 500 has been in decline since the beginning of the year. And so far, every rally attempt has been met with a wave of selling. The outlook seems grim, with second quarter earnings expected to be a disaster. What could possibly stop the rot? Well, any indication that inflation has peaked, and that the Federal Reserve can ease up on raising rates. That’s why the central bank, and investors everywhere, are fixated on the release of every single scrap of inflation data. For now, Payrolls take a back seat. 

The US Bureau of Labor (sic) Statistics usually releases its Non-Farm Payroll (NFP) report on the first Friday of each month. But occasionally, like now, it’s the second Friday. So, we have to wait until the 8th July to get the latest update. Historically, the NFP is considered the most important data release of each month. It is the most extensive employment measure of the world’s biggest economy, so is considered a strong indicator of global economic health, even though it is backward-looking. It’s important to traders as it can often lead to dramatic market movements, particularly if the release is significantly outside market expectations. Payrolls versus inflation But we have seen a marked shift in attitude towards the Non-Farm Payroll data. This has been particularly noticeable over the last year and a half, as we move further away from the chaotic month-on-month payroll changes we saw as the pandemic took hold. The NFP release has lost its ranking as the top monthly data release. Instead, it is inflation numbers, particularly the Consumer Price Index (CPI) and Core Personal Consumption Expenditures (PCE) that now engage traders and commentators alike. Dual mandate The US Federal Reserve has a dual mandate. One part is to maximise employment and the other is to work to ensure financial stability. The former requires no explanation, but the latter is all about controlling inflation. The Federal Reserve has a 2% inflation target, as measured by Core Personal Consumption Expenditures. Core PCE differs from Core CPI in that it only measures goods and services targeted towards and consumed by individuals. It tends to understate inflation when compared to the CPI data. But most investors focus on CPI, even when considering the Fed’s 2% target.  Record lows Back in 2020, as governments around the world responded to the coronavirus by locking down the global economy, the US lost over 21.5 million NFP jobs in just two months. Since then, there’s been a relatively steady increase in payrolls. While still just over a million short of making back all those lost jobs, the Unemployment Rate stands at 3.6%. That is just 0.1% above the pre-pandemic level, which was itself close to a 50-year low. For now, at least, employment isn’t the issue. Inflation is. We’re already experiencing soaring prices and a cost-of-living crisis, leading directly to a fall in demand. Consumption is estimated to account for around 70% of US economic activity when measured by GDP. Put a dent in this and companies will lay off workers. The government loses tax revenues while benefit payments rise, and the jobless cut back on spending. Corporations cut more staff, and a downward spiral takes hold within a recessionary environment.  Inflation and monetary policy Headline year-on-year CPI stood at 1.5% in March 2020. It dropped to +0.1% in May, its lowest in just under five years, before pushing higher. By May 2021 it stood at 5.0%, well above the 2% target, as members of the US Federal Reserve insisted it was transitory and nothing to worry about. Last month it reversed a small decline to hit 8.6%, its highest level in forty years. The fear is that it has yet to peak. This has forced the US central bank to switch to an unexpectedly aggressive pace of monetary tightening. Just to give some perspective, between the beginning of 2016 and December 2018, the Federal Reserve raised rates to 2.5% from below 0.25%. By the summer of 2019 it was reversing course, cutting rates until the Fed Funds was back below 0.25% by April 2020. It began raising rates in March this year and has continued at each meeting since, taking the Fed Funds rate up to an upper limit of 1.75%. The Fed is expected to raise rates to 2.5% at its July meeting, with the terminal rate expected to be between 3.5 and 4.0%, possibly by year-end. This tightening is having a devastating impact on equity and bond prices. The S&P 500 has been in decline since the beginning of the year. And so far, every rally attempt has been met with a wave of selling. The outlook seems grim, with second quarter earnings expected to be a disaster. What could possibly stop the rot? Well, any indication that inflation has peaked, and that the Federal Reserve can ease up on raising rates. That’s why the central bank, and investors everywhere, are fixated on the release of every single scrap of inflation data. For now, Payrolls take a back seat. 

Better-than-expected jobs data raised the likeliness of a bumper rate hike this month, but with markets having finally stabilised it seems the focus will instead shift to corporate earnings. US employment data proves resilient for now “The latest US jobs report helped alleviate fears that the widely anticipated recession could begin to hit business investment and hiring decisions. Nevertheless, we have seen some weakness for US markets as better-than-expected payrolls, and stable unemployment/wages strengthen the case for a 75 basis-point hike in three-weeks’ time. Inflation remains the key concern for the Fed, and the absence of major red flags in the economy serves to raise the likeliness of Fed action to stifle price pressures. As ever, it is the tech-focused Nasdaq that suffers to the greatest degree, with bloated valuations coming into question in the face of surging rates and a potential recession.” Focus to shift to earnings, as rising commodities impact demand and margins “Economic concerns are expected to take a back seat in the coming weeks, with US banks kicking off earnings season on Thursday. Inflation remains the key concern for businesses and customers alike, as we keep a keen eye out for whether rising costs are passed on to the bill or the bottom line. With commodities such as Lumber and Natural Gas outperforming over the course of the week, companies must continue to decide whether to price out demand or slash their margins.”

Cable lost traction after upbeat US jobs data and returned below 1.20 handle, erasing the good part of Thursday’s recovery. Fresh weakness generates initial signal that bounce was short-lived, as technical studies on daily chart are bearish and the latest US data added to negative fundamentals for pound, as better than expected June figures confirm the strength of the labor market, supporting Fed’s idea of another aggressive hike this month that would further inflate the greenback. Bears look for eventual close below pivotal supports at 1.2080/00 (Fibo 76.4% of psychological 1.20 support after two attempts failed that would confirm bearish stance and risk deeper drop. Res: 1.2055; 1.2084; 1.2104; 1.2152 Sup: 1.1919; 1.1875; 1.1822; 1.1751

China Q2 GDP – 15/07 – this week’s China Q2 GDP numbers are unlikely to tell a positive story. With retail sales and industrial production affected by the various covid lockdowns that were imposed across the country and Shanghai locked down for most of April it’s going to be a very tall order for the Chinese economy get anywhere close to its annual GDP target for this year of 5.5%. In Q1 the economy was said to have seen an expansion of 4.8%, which comes across as extremely generous. Retail sales plunged in April and May and are likely to have remained weak in June, while industrial production has also been disappointing. The various lockdowns have also shutdown Chinese ports as well businesses. One particularly significant statistic during April was that not a single car was sold in Shanghai through the entire month. Against such a backdrop its hard to make the case for any sort of significant economic expansion during Q2 at all. Annualised GDP is expected to come in at 1% and decline -2.3% Q/Q.   China retail sales (Jun) – 15/07 – it’s set to be a disappointing quarter for Chinese retail sales. Having declined by -11.1% and -6.7% in April and May it’s hard to make a case for a significant pick up apart from a reopening bounce as lockdown restrictions got eased and people were briefly allowed out to restock on essentials. Another monthly decline in retail sales activity would be the worst run since the first lockdown was announced back at the beginning of 2020. Industrial production appears to be showing more signs of life having rebounded by 0.7% in May after slipping by -2.9% in April. Nonetheless economic activity is likely to remain subdued while Chinese authorities continue to lockdown at the merest hint of an outbreak.   US CPI/PPI (Jun) 13/07 – ordinarily US CPI numbers aren’t something that prompts the US central bank to shift on policy given that its preferred inflation measure is core PCE. The recent May CPI numbers prompted a different reaction, rising sharply to 8.6% and in so doing marking a significant shift in central bank thinking during a policymaker blackout period. The act of anonymously briefing financial markets through friendly journalists that a 75bps rate hike was being actively considered in a significant shift in guidance was hugely controversial and also fraught with danger when it comes to future guidance expectations. It’s still highly uncertain as to whether the May CPI number was a one-off given that all other inflation measures do appear to show signs of plateauing. Recent PPI numbers appear to support this mindset down from 9.6% in March and falling to 8.3% in May. We already have a number of Fed policymakers arguing for another 75bps rate hike at the July meeting. Expectations for this week’s June CPI number is for a rise to 8.8%, and a new forty year peak. This rather flies in the face of recent prices paid data, as well as the recent weakness in PPI and core PCE, which have been trending lower since March. If US CPI suddenly slips back in June, does that weaken the case for a 75bps, and make the prospect of a 50bps more likely? Time will tell, but weak CPI and PPI numbers for June probably won’t weaken the case for 75bps at the July meeting, but they could weaken the argument for further aggressive rate action over the rest of the year.         US Retail Sales (Jun) – 15/07 – having seen US retail sales post four successive months of gains at the start of this year, we were somewhat overdue a slowdown in May. That we saw retail sales slide by -0.3% came as a bit of surprise, but should it have done? When looking at the rising cost of living from energy and food prices, as well as the wider cost of living its perhaps not surprising that US consumer spending slowed sharply in May. Consumer confidence has been falling steadily for months now, and it was only a matter of time before it showed up in the retail sales numbers. June retail sales are expected to come in at 0.9%, which seems optimistic at a time when consumer confidence is still plunging and prices are still rising.    Bank of Canada rate decision – 13/07 – at its last rate meeting the Bank of Canada raised interest rates by 50bps which was in line with expectations, however the statement suggested more aggressive hikes were likely, due to the risks of elevated CPI becoming entrenched. CPI in Canada has already risen to 7.7% in May, jumping sharply from 6.8% in April. The risks of elevated CPI “has risen”, which suggests that the Bank of Canada will...