Week Ahead: US NFP looms as markets enjoy weak data and Fed pivot

Updated July 29, 2022

Investors have had a lot to chew over recently with the “Goldilocks” scenario of weak data and positive megacap earnings topped off with a potentially less hawkish US Federal Reserve. Investor fears about the aggressive pacing of the Fed’s rate hikes has started to wane while the idea that inflation may have started to peak is settling in again. Although the “technical” recession confirmed by the GDP data in the US last week is good news for financial conditions, investors should perhaps be asking themselves if we should really be celebrating recession risks. The signal by policymakers at its FOMC meeting that it may slow the policy tightening path should be tempered by the fact that the Fed has historically paused just before previous recessions.

The dollar is closing a choppy week of price action with a “doji” candlestick. That denotes some indecision or equality between bulls and bears. It can also generally signal that prices may soon undergo a reversal. A correction in the greenback was to be expected with its bull trend going back to the start of the year overbought on several timeframes. The fall in bond yields has given the green light for some dollar selling though we remind ourselves that Chair Powell did again repeat that the Fed is prepared to sacrifice growth to beat inflation down toward its target.

US non-farm payrolls will be the main event of the week with consensus expecting a headline print of 250,000. With the jobless rate expected to remain near multi-decade lows at 3.6% and wages still growing around 5% annually, Fed rate hikes of at least 50bp are still priced in for the next meetings in September and November. We expect volatility to spike as Fed officials are now much more data dependent. But a resilient jobs market may postpone the prospect of a “real” recession for now, underpinning some support for the dollar. On the flip side, any major disappointment in the data would see more dollar longs exit. 

The Bank of England is priced to deliver a 50bp rate hike on Thursday, but there seems to be little runway to roll out multiple large hikes further out. Many economists think that the bank may be forced to cut rates sooner than thought in 2023, but policymakers will have to deal with double-digit inflation before then. Cable is currently battling with trendline resistance and the long-term downtrend is expecte dto reassert itself soon.

Major risk events of the week

01 August 2022, Monday:

-US ISM: The market median predicts the survey will fall to 52.1 in July from the prior 53.0 print. This was the third straight monthly decline and pushed the index to its lowest level since May 2020. Supply and costs pressures are weighing on manufacturing activity.

2 August 2022, Tuesday:

RBA Meeting: The market believes the RBA will deliver a third consecutive 50bp rate hike, lifting the cash rate to 1.85%. Analysts expect headline inflation to climb to over 7% by year end, well above the RBA’s 2-3% target band. With the labour market the tightest in 50 years, the cash rate is forecast to rise to 3.4% in early 2023.

4 August 2022, Thursday:

-Bank of England Meeting: Analysts expect a 50bp rate hike, the first such move of this cycle, taking the Bank Rate to 1.75%. Markets forecast a peak rate of 2.9%. Goldman Sachs says the bank’s cautious approach on raising rates as it lets a squeeze on incomes cool inflation will lead to further losses in the pound.

5 August 2022, Friday:

-US Non-Farm Payrolls: Consensus expect more job gains with a median forecast of 250k for the headline print. This comes after a third straight beat in June, but revisions to past data. The unemployment rate is estimated to remain at 3.6% and support wage growth which is forecast at 0.4% m/m.

Canada Jobs: Healthy job gains are expected even as the economy posted a surprise decline in jobs last month. But the unemployment rate unexpectedly fell in June to 4.9%, a new record low. The tightest labour market in generations is likely to remain.

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