Week Ahead: NFP to underpin dollar support and Fed rate hikes

Updated July 1, 2022

Markets remain volatile as price pressures stay elevated and central bankers are keen to assert their inflation fighting credibility. Even though there were few new takeaways from the ECB’s Sintra conference last week, the trio of Powell, Lagarde and Bailey continued to reiterate the need for tighter policy to bring inflation to heel. But this approach is raising concerns over a “hard landing” and has been hurting equity markets.

These themes look set to remain even in a holiday shortened week in which the US celebrate Independence Day on Monday. Two noteworthy releases come in the form of the monthly non-farm payrolls report and the minutes from the June FOMC meeting. Of course, this was an historic event where Fed policymakers hiked rates by 75bps in response to the May inflation data and expectations in the Michigan consumer survey. We have heard from several Fed officials since the meeting, but any more detail on the path of policy tightening will be closely followed. The dollar will continue to flourish as risk sentiment deteriorates and while the Fed sticks to its aggressive policy tightening.

Friday’s jobs report will likely signal a tight labour market which supports the case for further Fed tightening. There are currently around 11 million job vacancies, which is the equivalent to nearly two vacancies for every unemployed American. The pace of job gains is moderating but only a shocking miss would get the attention of the Fed and slow the dollar’s ascent.

Globally, seven central banks will announce policy decisions with top billing going to the RBA. The Australian central bank has abruptly shifted into full “inflation-fighting” mode in recent months and lifted rates by 75bps over its prior two meetings. A half-point move is expected as policymakers continue their “front-loading”. The energy crunch points to continued inflationary pressures, while the labour market remains tight. Even so, the aussie may not get a lot of love from the hike as general market dynamics batter the cyclical currency. The break of cycle support on Friday at 0.6828 in AUD/USD looks like a signal for more downside.

Major risk events of the week

05 July 2022, Tuesday:

-RBA Meeting: The market expects the RBA to deliver a back-to-back 50bp rate hike, lifting the cash rate to 1.35%. Headline inflation is forecast to hit near 7% by year end, the labour market is the tightest in 50 years and wage growth is accelerating. Analysts see rates rising to 1.85% by August and peaking at 2.6% in February 2023.

06 July 2022, Wednesday:

FOMC Minutes The 75bp increase in rates during the June meeting was the biggest by the Fed since 1994. This was prompted by the May US CPI data and the inflation expectations component of the Michigan consumer sentiment survey. Any new detail on the path for more rate hikes will be key.

30 June 2022, Thursday:

-US Core PCE: Analysts forecast the total PCE price index and core PCE index to rise sharply to 0.7% m/m and 0.4% m/m respectively. The annual core figure is expected at 4.8%, down a tick from the May print. A bigger slowdown could prompt markets to reassess the likely scale and timing of the Fed rate hike path, which would see dollar selling.

08 July 2022, Friday:

-US Non-Farm Payrolls Consensus expect more healthy job gains with a median forecast of 250k for the headline print. This comes after a beat in May but small revisions to past data. The unemployment rate is estimated to remain at 3.6% and support wage growth which is forecast at 0.3%.

-Canada Jobs: Analysts forecast that net employment is likely to rise by 30,000 in June, after more jobs were added in May The unemployment rate inched down to a new record low at 5.1%. Markets have priced in a 75bp rate hike for the Bank of Canada’s next meeting on July 13.

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