What do we have in June minutes? And our expectations from NFP!
Friday, all eyes will be on NFP numbers to find out more about FED's next possible move in the policy meeting, which will be held July 27-28.
The Fed raised the possibility of a higher rate hike in the June FOMC monetary policy meeting minutes to satisfy the committee's legislative mandate to promote maximum employment and price stability. As Powell repeatedly said that inflation is the priority for FED, "inflation" was repeated as many as 90 times in minutes, reflecting policymakers' heightened concern about possible further inflation growth.
Minutes also show that FED officials believe an inflation decrease to 2% will take time as supply constraints have yet to improve. So as FED speakers told it, the following decisions will be based on economic growth, which is why they did not specify the rate hike numbers.
Now, with today's NFP numbers, we can have a brother idea of what the FED can decide in the next meeting. In this Nonfarm Payroll report, we have to watch different factors. As you know, reports include the new crated numbers, unemployment rate, participant's rate, and average hourly earnings. Between them lately, Average Hourly Earnings got more important as it directly affects inflation. Higher salaries equal more liquidity in the society, which will increase inflation again. Therefore, in this report cooling average hourly earnings will be a kind of reassurance that inflation can decrease. In the May report, we saw those average earnings raised by 5.2% annually and 0.3% monthly, which is expected to be repeated in June as well.
Moreover, about the newly created jobs, which is the essential part of the report, the market expects to see 268K payrolls, which is 22K lower than May's 390K jobs.
FED believes the labor market is strong, though FOMC members say unemployment can increase above 4% before a new improvement round.
If this report confirms the substantial improvement, it means that FED will have more reason for the rate hikes with more significant digits, like another 75 bps, and lift the US dollar to a higher level. However, if better payrolls come with decreasing earnings, then inflation concerns will decrease, and in this scenario, Stock markets can grow, and the US dollar will give back some of its recent gains.
On the other hand, downbeat data will be the worst case, which can also affect the global economy. IF investors feel that the most powerful economy could not handle the pressures, and now people are losing their jobs -as we saw the improving layoff numbers in the JOLTs report- and the economy is not able to hire more employees, the fear of spreading recession in the US, and other economies are becoming more common. If we see weaker numbers, the US dollar will increase again, and stocks will be under pressure. However, it does not mean sharp downside movement in the stock markets. As it said, "When the US sneezes, the world catches a cold."
There are other possible scenarios, but market reaction to other scenarios depends on the numbers. Overall, this report is supposed to cause more volatility in the market, as it is before the FED meeting and can affect both FED criteria for their decisions, inflation, and the Labor market.
