Source: Jin10 Data
If inflation and employment data both soften, it will trigger a bigger debate about whether the data is rebalancing or beginning to deteriorate.
Forecasters expect that the US non-farm payroll report, which is scheduled to be released on Friday, will show that the pace of job growth slowed in June, while wage growth also slowed.
According to estimates from foreign media surveys, non-farm payrolls last month may have increased by 0.19 million, and average hourly wages are expected to increase by 3.9% year-on-year, the lowest level in three years. In addition, the unemployment rate is expected to remain at 4%, the highest level in more than two years.
The cooling labor market will support the Fed policymakers who seek multiple rate cuts this year. Investors generally expect that the Fed will cut interest rates at its September and December meetings. Economists Anna Wong, Stuart Paul, Eliza Winger and Estelle Ou wrote:
"Overall employment data may indicate that the Fed can remain patient in rate cuts, but the recent rise in the unemployment rate shows a stronger sense of urgency. We believe that the Fed will have enough evidence to start cutting rates at the FOMC meeting in September. "
The non-farm payrolls report includes two surveys: one is a company survey, which will determine wage data, and the other is a household survey used to calculate the unemployment rate. The results of these two surveys have differed greatly this year, with the company survey showing a good labor demand and the household survey showing the opposite.
Many Fed officials have emphasized that the surprisingly strong growth in non-farm payroll data so far this year is unexpected. If the number of new jobs added is less than 0.2 million, it will make this data more consistent with the household survey data.
For wage growth, forecasters expect that average hourly wages in June will increase by 0.3% month-on-month. In May, this data unexpectedly increased by 0.4%. The latest wage data may result in the annual wage growth rate falling below 4% for the first time, which enhances market confidence that US inflation will continue to slow.
Economists expect that the report will show the unemployment rate remaining unchanged at 4%, and the labor participation rate rising to 62.6%, reversing the downward trend in May. The decline in May was concentrated mainly in the 20-24 and 55 and older age groups. The so-called "prime working age" participation rate, the participation rate of the 25-54 age group, rose to its highest level since 2002 in May.
Santander Capital Markets chief economist for the United States, Stephen Stanley, said in a report on July 3, "The weakness of the household survey results in May was almost completely driven by a significant decline in employment in the 20-24 age group. I expect that the abnormality in May will be corrected in June, and the participation rate will rebound sharply."
Analysts at BNP Paribas believe that the market's reaction to non-farm payrolls data may be asymmetrical. After the core PCE inflation rate rose by only 0.1% last month, the smallest increase since November last year, the market's reaction to weaker-than-expected non-farm payrolls data may be greater than the reaction to better-than-expected data.
If both inflation and employment soften, it will trigger a larger debate about whether the data is rebalancing or beginning to deteriorate. Weaker-than-expected non-farm payroll data-especially if accompanied by an increase in the unemployment rate-may solidify the market's pricing for the Fed's two interest rate cuts in 2024 and force the market to re-evaluate the already high terminal rate. At the same time, although the surprise upside data will lead to a sell-off of rate expectations, the accompanying steeper rate trend will be limited because recent inflation has made good progress and the Fed will continue to maintain its loose stance.
City Index senior analyst Matt Simpson said, "The weak ISM service report is the gift that the Fed doves have been waiting for before the non-farm payroll data is released. If non-farm payroll data confirms the economic cracks we see elsewhere, the gold price may rise to $2,400. I guess the US dollar index will not retest 106 in the short term, so we expect traders to avoid trading the rebound of the US dollar and buy gold on dips."
Editor / jayden