Why a strong U.S. labor market amid resilient demand may mean aggressive rate hikes

The latest US jobs report ahead of the Federal Reserve’s September policy meeting likely showed employers continued to add jobs at a healthy – albeit more subdued – pace in August, underscoring the sustainability and the strength of the labor market and the need for an aggressive policy response to curb inflation, economists said.

Friday’s jobs report is expected to show an increase of 300,000 jobs in August, according to the median estimate from a Bloomberg survey of economists. The jobless rate is expected to hold steady at 3.5%, a five-decade low, while the average hourly wage has likely recorded another solid gain.

Fed Chairman Jerome Powell signaled last week that the US central bank would likely continue to raise interest rates and leave them high for some time to stamp out inflation. He noted that this would likely lead to looser labor market conditions and cause hardship for households and businesses.

In the days leading up to the jobs report, a host of other indicators will offer additional insight into the state of the labor market. The government will publish data for July on vacancies and departures on Tuesday.

Economists expect job vacancies to remain elevated during the month, indicating resilient labor demand warranting a strong policy response to contain inflation.

A day later, the ADP Research Institute will release its revamped monthly report, with data on jobs and wages.

“We expect the pace of hiring to slow in August – but given our expectation of a flat labor force participation rate, it will take very little additional employment for the unemployment rate to decline slightly. The strength of this report could seal the deal for the Fed to opt for another 75 basis point hike in September,” Bloomberg economists Anna Wong, Yelena Shulyatyeva, Andrew Husby and Eliza Winger said in a report.

Elsewhere, Eurozone inflation is expected to hit a new record high, while Chinese PMIs are expected to remain weak. In Canada, second quarter GDP will likely show that the expansion is running out of steam after a strong first quarter.

China’s PMI readings for August headline Asia’s economic calendar on Wednesday, with an intense focus on the drag caused by restrictions to halt the spread of Covid-19 and an ongoing housing crisis. .

South Korea’s trade-dependent industrial production and export data will provide the latest information on the global economic slowdown.

In Japan, data on industrial production and retail sales will give clues to the progress of the recovery in the world’s third-largest economy. As inflation continues to climb above the Bank of Japan’s target rate, board member Junko Nakagawa will deliver the latest policy thoughts.

BOJ Governor Haruhiko Kuroda said in Jackson Hole on Saturday that almost all of the country’s inflation was caused by rising commodity prices and that the central bank should continue with an accommodative monetary policy for the time being. .

“We have no choice but to continue monetary easing until wages and prices rise in a stable and sustainable way,” Kuroda said.

Retail sales and house price data from Australia, as well as business confidence data from New Zealand, will provide insight into the state of the two economies as rate hikes are expected to continue.

India will release GDP figures on Wednesday that will show a robust recovery in the services sector after a wider reopening from the pandemic.

Eurozone inflation is taking center stage, with economists predicting it will hit 9% when August data is released on Wednesday. Looking ahead, the region’s four major economies are also releasing figures.

Those numbers could convince policymakers at the European Central Bank to raise borrowing costs with another big hike on Sept. 8. While officials have pledged to raise costs again, few have publicly indicated how much of a move they would like. At least six of them – including chief economist Philip Lane – could provide more clarity when they speak before the start of the central bank’s official silence period on Thursday.

The inflationary situation would be exacerbated if Russian gas were permanently cut off. Gazprom plans to close the Nord Stream gas pipeline for three days of maintenance starting Wednesday. It is feared that streams will not resume after that.

German Finance Minister Christian Lindner said in an interview published on Sunday that the government needed to deal with soaring electricity prices “as a matter of urgency”.

The Bank of England could increase by half a point when it meets in mid-September. The central bank will release its own survey this week, likely to show that business policymakers expect inflation to pick up.

In Hungary, the central bank decides the base and weekly interest rate, with policymakers set to make hikes as inflation beats forecasts and the currency slumps.

Turkey’s trade balance figures are expected to show a further widening of the deficit, while economic output in the second quarter could be stronger than the 7.3% growth recorded in the first three months of the year.

Updated: August 28, 2022, 7:41 p.m.

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