The US labour market seems to be letting off steam. Indicators ahead of official employment statistics point to a cooling of the market. New weekly jobless claims data showed an increase to 235k against expectations of 230k and 231k a week earlier. The upward trend has been in place for the last three months after touching lows of 168k.  The open job vacancy figures for May are mainly in the same way. Their decline in the last six months from the historic highs should not be construed as a deterioration in the economy. However, the current volume of applications and a slight decrease in open job vacancies are more likely to indicate a recovery from workers who have started to change jobs more actively. Perhaps they needed time to refresh their skills. If we are right, Friday’s June data release could prove strong. Employment growth is expected to slow from 390K to 275k and wage growth to 5% y/y. Significantly higher data would indicate a labour market rotation. In this case, the 20-year highs for the Dollar look justified, and there remains further upside potential on expectations of further aggressive tightening from the Fed.  If the rate of new job gains continues to slow down, however, this would be an extremely negative signal that could halt the Dollar’s rally. 

EUR/USD tumbled to a fresh two-decade low and was pressured by a combination of factors. The energy crisis in Europe continued furling recession fears and weighed on the shared currency. The USD prolonged its recent bullish run and further contributed to the pair’s sharp downfall. The EUR/USD pair witnessed heavy selling for the second successive day on Wednesday, marking the fifth day of a downfall in the previous seven and plunged to a fresh decade low. Recession fears remain the central theme in the markets, which, along with the energy crisis in Europe, cast a shadow over the region's economic outlook. This, in turn, continued undermining the shared currency, further pressured by softer domestic data. The Eurozone Retail Sales posted a modest 0.2% increase in May and German Factory Orders fell 3.1% during the reported month. Apart from this, strong follow-through US dollar buying exerted additional downward pressure on the major.  Against the backdrop of the worsening global economic outlook, aggressive Fed rate hike expectations assisted the safe-haven USD in prolonging its recent bullish run. The prospects for a faster policy tightening by the Fed were reaffirmed by the unsurprisingly hawkish minutes of the June 14-15 FOMC meeting. Policymakers emphasized the need to fight inflation even if it meant slowing an economy and indicated that another 50 or 75 bps rate hike is likely at the July meeting. This followed the release of better-than-expected US data on the services sector and the JOLTS Job Openings report. Adding to this, a goodish rebound in the US Treasury bond yields further boosted the buck. The combination of factors contributed to the EUR/USD pair's decline, taking along some trading stops near the 1.0200 round-figure mark. Overstretched oscillators on short-term charts helped spot prices to find some support ahead of the 1.0150 region. Furthermore, a slight recovery in the risk sentiment held back the USD bulls from placing fresh bets and provided a modest lift to the major during the Asian session on Thursday. Traders now look forward to the German May Industrial Production figures for some impetus ahead of the  US Weekly Initial Jobless Claims. The focus, however, would remain on the closely-watched US NFP report on Friday. Technical outlook From a technical perspective, the overnight swing low, around the 1.0160 region, now seems to act as a pivotal point, below which spot prices could extend the fall towards the 1.0100 mark. Some follow-through selling would make the EUR/USD pair vulnerable to challenging the parity mark in the near term. On the flip side, the attempted recovery move is more likely to confront stiff resistance near the 1.0275-1.0280 region. This is closely followed by the 1.0300 round figure, which if cleared should lift the EUR/USD pair towards the 1.0350 support breakpoint, now turned resistance. Sustained strength beyond could trigger a short-covering move and allow bulls to reclaim the 1.0400 mark, though the momentum runs the risk of fizzling out rather quickly.

Summary The message from the June ISM report is that service activity is cooling rather than buckling. Business activity rose during the month and while new orders declined, the index remains above the 50-threshold designating expansion from contraction. Service-providers continue to contend with an array of supply issues, which are limiting capacity and keeping the heat turned up on prices. Source: Institute for Supply Management and Wells Fargo Economics Read the full report

FOMC will release the minutes of the June policy meeting on Wednesday, July 6. Markets have nearly fully priced in another 75 basis points rate hike in July. Investors will pay close attention to discussions around the September rate decision. The US Dollar Index (DXY), which tracks the greenback’s performance against a basket of six major currencies, surged above 106.00 and reached its highest level in nearly two decades on Tuesday. The widening policy divergence between the US Federal Reserve and other major central banks, especially the European Central Bank, continues to boost the dollar. Additionally, the currency capitalizes on safe-haven flows with investors growing increasingly worried about a global recession. The US Federal Reserve will release the minutes of its June meeting, at which it decided to hike the policy rate by 75 basis points (bps), on Wednesday, July 6.  Neutral scenario The CME Group FedWatch Tool shows that markets are pricing in a 93% probability of another 75 bps rate increase in July. Hence, it would be surprising to see a market reaction in case the Fed’s publication confirms such a policy move later in the month. Cleveland Fed President Loretta Mester, San Francisco Fed President Mary Daly and Fed Governor Michelle Bowman are among Fed officials who openly said that they would support a 75 bps rate hike in July. Additionally, the Commodity Futures Trading Commission’s (CFTC) latest Commitments of Traders (COT) report showed that net long dollar index positions declined last week after having climbed to their strongest levels in early June. Hence, a “buy the rumour sell the fact” market action could cause the DXY to stage a technical correction. Moreover, the index remains technically overbought following Tuesday’s impressive rally.   Hawkish scenario Currently, there is a more-than-80% chance of a 50 bps rate hike in September. This market positioning suggests that there is room for a hawkish surprise in case the minutes reveal that policymakers are willing to consider one more 75 bps hike in September if they don’t see any signs of inflationary pressures easing until then. In that scenario, the benchmark 10-year US Treasury bond yield, which fell by nearly 10% in the last two weeks, could regain traction and help the dollar preserve its strength.  The Fed’s Summary of Economic Projections, the so-called dot plot, showed the median view amongst policymakers is that interest rates will end 2022 at 3.4%, well up from 1.9% in March’s dot plot. Currently, the federal funds rate is 1.5%-1.75%, leaving room for a total of 175 bps hikes in the last four meetings of the year. Two more 75 bps rate hikes in July and September could open the door for the policy rate to come closer to 4% toward the end of the year unless the Fed unexpectedly decides to pause rate increases. Dovish scenario If the minutes unveil that policymakers refrain from committing to a specific size of a rate hike after July and want to see how the economy and the inflation outlook develops, this could be seen as a dovish tone and trigger a dollar selloff. It’s worth noting that the latest PMI surveys from the US displayed that the business activity in the private sector lost significant growth momentum in June. Market participants could start pricing in a less aggressive tightening stance in the last quarter of the year if they see that policymakers are worried about tipping the economy into recession. Conclusion Investors are trying to figure out whether or not the Fed will continue to sacrifice growth to battle inflation. Since a 75 bps rate hike in July is nearly fully priced in, the minutes of the June policy meeting will be looked upon for fresh clues regarding the policy stance in the fourth quarter. Unless investors are convinced that another 75 bps hike in September is more likely than not, the DXY could find it difficult to push higher and make a downward correction. Nevertheless, with the greenback holding its status as a safe haven, a Fed-inspired dollar selloff should remain short-lived.   

A combination of factors dragged EUR/USD to its lowest level since December 2002 on Tuesday. A further rise in gas prices fueled recession fears and weighed heavily on the shared currency. Aggressive USD buying also contributed to the selling bias and confirmed a fresh bearish break. The EUR/USD pair plunged to its weakest level since December 2002 on Tuesday, and the steep intraday decline was sponsored by a combination of factors. The shared currency was pressured by a big jump in natural gas prices, which could drag the Eurozone economy faster and deeper into recession. Moreover, the risk of gas shortages that could disrupt industrial activity across the region if Russia cuts off supplies forced investors to trim ECB tightening bets. This comes on the back of German Bundesbank chief Joachim Nagel's caution on Monday against the use of the anti-fragmentation tool to shield highly indebted countries from surging borrowing rates. Apart from this, a blowout US dollar rally further contributed to the pair's overnight slump. The Federal Reserve’s non-stop chatter about rate hikes to curb soaring inflation continued lending support to the USD. Apart from this, the prevalent risk-off environment lifted the safe-haven buck to a fresh two-decade high. The market sentiment remains fragile amid concerns that rapidly rising interest rates and tightening financial conditions would challenge global economic growth. Apart from this, the ongoing Russia-Ukraine war and the COVID-19 outbreak in China have been fueling recession fears. This, in turn, tempered investors' appetite for perceived riskier assets, evident from a weaker tone around the equity markets. Meanwhile, the USD bulls seemed unaffected by the recent slump in the US Treasury bond yields. That said, extremely overstretched conditions forced the USD bulls to take a brief pause and helped limit any further losses for the EUR/USD pair, at least for the time being. Traders also seemed reluctant to place aggressive bets. They preferred to wait on the sidelines ahead of the FOMC monetary policy meeting minutes, scheduled to be released later during the US session this Wednesday. The minutes would be scrutinized for fresh clues about the Fed's policy tightening path. Apart from this, the US monthly jobs report (NFP), due on Friday, will influence the near-term USD price dynamics and provide a fresh directional impetus to the major. Nevertheless, the fundamental backdrop supports prospects for an extension of the well-established bearish trend. Technical outlook From a technical perspective, the convincing overnight breakdown through the 1.0350 horizontal support adds credence to the negative outlook. That said, RSI (14) on the daily chart has moved on the verge of breaking into the oversold territory and makes it prudent to wait for some near-term consolidation or modest rebound before the next leg down. Hence, any subsequent decline will likely find some support near the July 2002 swing high, around the 1.0200 round-figure mark. Some follow-through selling, however, would be seen as a fresh trigger for bearish traders and pave the way for additional losses. The EUR/USD pair would then turn vulnerable to challenge the parity mark. Conversely, any meaningful recovery attempted might confront stiff resistance and attract fresh selling near the 1.0300 round-figure mark. This, in turn, should cap the EUR/USD pair near the 1.0350 support breakpoint, now turned resistance, which seems to act as a pivotal point. Sustained strength beyond could trigger a short-covering move and allow bulls to reclaim the 1.0400 mark, though the momentum runs the risk of fizzling out rather quickly.

A recession has started, but what will it look like? Nonfarm Payrolls and Employment Levels from BLS, chart by Mish Despite fantasy soft landing theories by the Fed, president Biden, and Treasury Secretary Janet Yellen, a Recession Has Clearly Started Some say it's too early to make the call and jobs are too strong. Others say it takes two quarters of negative GDP. However, it doesn't take two quarters of negative GDP. The NBER is the official arbiter of recessions and the committee looks at a variety of factors.  The NBER's definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months. In our interpretation of this definition, we treat the three criteria—depth, diffusion, and duration—as somewhat interchangeable. That is, while each criterion needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another. For example, in the case of the February 2020 peak in economic activity, the committee concluded that the subsequent drop in activity had been so great and so widely diffused throughout the economy that, even if it proved to be quite brief, the downturn should be classified as a recession. Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dates? A: Most of the recessions identified by our procedures do consist of two or more consecutive quarters of declining real GDP, but not all of them. In 2001, for example, the recession did not include two consecutive quarters of decline in real GDP. In the recession from the peak in December 2007 to the trough in June 2009, real GDP declined in the first, third, and fourth quarters of 2008 and in the first and second quarters of 2009. Real GDI declined for the final three quarters of 2001 and for five of the six quarters in the 2007–2009 recession. In 2001, GDP didn’t contract for two consecutive quarters, but the NBER labeled it a recession anyway. In 2020, the recession was over in two months. Expect Minimal Rise in Unemployment Jobs are a lagging indicator but there are many reasons to expect a minimal rise in unemployment.  The lead chart offers a clue why. The economy still has not recovered all of the jobs lost from the 2020 recession.  While technology is shedding jobs, the leisure and hospitality sector still begs for employees.  Meanwhile, the potential for Boomers to retire is very high and rising.  Employment Levels in Retirement Age Groups  Age 60+ Employment  In 2022: 22.09 Million In 2008: 13.46 Million In 1999: 8.22 Million In 1981: 7.21 Million   There are over 22 million people age 60 or over who are still working. We have never seen anything like this before, so don't expect prior recessions to be a model for this one. Millions of these people will retire. Employment may drop substantially when these boomers and Gen X employees retire, but falling employment and rising unemployment are not the same thing in the Fed's eyes. Rise in Unemployment Rate  Rise in Unemployment Rate Key Points  In 12 previous recessions, the lowest rise in unemployment was in 1990 and 2001, 1.1 percent each.  The highest jump was 8.2 percent in 2020 and that was undoubtedly understated.  Given the pending levels of retirement and the incomplete jobs recovery from the 2020 recession, I expect this to be a very weak recession in terms of rising unemployment.  Recession Duration in Months  Recession Duration Key Points The 2020 recession only lasted 2 months. The 2008 recession lasted 18 months.   Expect Shallow and Long I see no use in averaging the above recession jambalaya. Instead, I expect the opposite of the 2020 recession.  2020 was very short and unprecedented steep. 2022 will be the opposite, perhaps unprecedented shallow from an unemployment standpoint. Fed's Hands Are Tied The Jobs data speaks for itself. That is half of the Fed's mandate. If jobs stay relatively strong as I expect, the Fed will have met that half of its mandate. The Fed's other mandate is price stability. Everyone on the planet knows the Fed flunked. It gets grade F. The Fed does not want another grade F. It will err on the side of caution unless there is a credit event or a collapse in jobs. Powell: "We understand better how little we understand about inflation” Let's review Powell's comments at the June 29 ECB economic forum: Powell: "We understand better how little we understand about inflation” Powell: “There’s a clock running here. The risk is that because of the multiplicity of shocks, you start to transition into a higher-inflation regime. Our job is literally to prevent that from happening, and we will prevent that...