3 Numbers: Weak US payrolls won't halt the hike
- Fed's Charles Evans will speak early (0745 GMT) on monetary policy divergences
- July the first opportunity for the Fed to hike as it comes after the Brexit vote
- US May jobs report expected to be mediocre, but enough for a July hike
- US ISM non-manufacturing index: turnaround from the weak first quarter is real
By Juhani Huopainen
The European session provides us with service purchasing manager indices and euro area retail sales, but now that the European Central Bank’s meeting is behind us, their impact on financial asset prices is likely to be limited.
Much more important will be the US data, as the Federal Reserve’s June meeting is only two weeks away. The July meeting is the first possible time to hike rates as it comes after the Brexit referendum.
As the July meeting does not come with a press conference, a July rate hike and its conditionality has to be explained at the June meeting. This means that today’s jobs data will be the last relevant data point for the June meeting.
Chicago Federal Reserve’s Charles Evans speaks (0745 GMT). Charles Evans will discuss the monetary policy divergence between the Fed and the ECB and the future of positive rates at 0745 GMT.
US May Employment report (1230 GMT). The US economy is expected to have created 158,000 new non-farm jobs in May – about the same as the 160,000 gain in April. The monthly increases have been very modest in early 2016 when compared to the average monthly gains during the past couple of years.
Wage growth seems contained, suggesting that the Federal Reserve does not absolutely have to raise rates.
This begs the question: Is the US labour market slowing down, or is the sign of slower hiring perhaps a supply-side problem, suggesting that employees are about to begin offering higher wages?
Unfortunately, the Fed is now captive to its own forward guidance. The Federal Open Market Committee minutes, several Fed speakers and most importantly, chair Janet Yellen said in a recent speech that the Fed should raise rates “in the coming months” – assuming economy continues improving and jobs are generated.
These conditions are seemingly met, and the Fed funds futures put the odds of a hike in June at 20% and by July at 58%. This suggest that unless there is a negative surprise, the rate will be hiked in July.
Interestingly, I did warn earlier that the rate hike odds were already as high as they could reasonably get, and expected the EURUSD to begin to move sideways or even higher, as rate hike odds could just as easily deteriorate a little bit.
The EURUSD has been steadily losing it's downside momentum, but has not made a convincing move higher. For the moment it is best to assume that the pair is in a horizontal trading range, which could very well continue all the way to the Fed's meeting.
Probably going "against" the ebbs and flows of the rate hike expectation is the best solution.
EURUSD daily chart
US May ISM Non-manufacturing report on business (1400 GMT). The service sector’s gauge is expected to remain almost unchanged at 55.5. The forward-looking indices deteriorated in 2015, predicting the current year’s weakness in the first quarter – especially in manufacturing.
But now that the indices have both been rising for several months, it is relatively safe to say that the economy has indeed bottomed-out.
The GDPNow-estimate for the second quarter’s economic growth is now at 2.5%. The currently positive outlook, coupled with the lack of financial stress (stocks are trading close to all-time-highs), is more than enough for the Fed to hike in July.
-- Edited by Adam Courtenay
Juhani Huopainen is a blogger and a macro analyst at More Liver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.