The dollar continued to strengthen on Monday after the release of the US labor market report on Friday, which did not confirm market pessimism about the US economy, reinforcing the view that the US is now an “island of stability” for large capital. The key measures of the US labor market remained in June at the level, which give the Fed grounds to confidently hike interest rate by 0.75% in July. Ahead is the release of the June CPI, which should point to a new high in inflation in the current business cycle (forecast 8.8% YoY), leaving no doubt that the Fed will continue to tighten policy at a galloping pace.
The US economy created 372K jobs in June, well above the consensus estimate of 265K. The number of jobs in the private sector increased by 381K against the forecast of 233K. The revised estimate for the previous two months was lower by 74K, however, the upside surprise in June Payrolls overshadowed that weak spot of the report. Along with upcoming June CPI release, the labor market report should lay the groundwork for a 75 bp Fed rate hike second time in a row.
The total number of jobs in the US thus rose to a level that is only 524K below the pre-pandemic level. By sector, tourism and leisure lag behind the most in terms of job growth, with 1.3 million jobs below February 2020 levels. However, the problem is not the low demand for labor, but the shortage of labor supply. The second weakest sector in terms of hiring is the civil service sector, however, along with the growth of government tax collections, the situation in 2023 will change for the better. The level of employment in other sectors is close to historical highs.
As for the rest of the report, the unemployment rate remained at 3.6%, wages rose by 0.3% m/m and 5.1% y/y, which was in line with consensus. Somewhat disappointing was the labor force participation rate, which dropped from 62.3% to 62.2%. Given quite low unemployment rate, LFPR recovery is necessary to ease the imbalance between strong demand and weak supply in the labor market, but so far this has not happened. There was hope that the decline in the stock market would hit wealth, primarily pension savings, and force some of the workers to start looking for work, but the market correction did not produce the desired effect, and this means that companies continued to experience difficulty in hiring and are likely to be forced to raise wages further, which speaks in favor of unfavorable inflation outlook.
Some other employment reports, such as the JOLTS report or the NFIB Small Business Survey, have shown that there are nearly two jobs for every unemployed American, and that 50% of small businesses have jobs that cannot be filled yet:
The NFP report turned out to be one of the few positive macro reports that came against other weak indicators of activity. Despite market pessimism, US companies’ demand for labor remains strong. Against this background, the Fed is likely to raise rates by 75 bp in July, the odds of such an outcome according to rate futures is already 93% against 86.2% last week:
Further pace of Fed rate hikes is likely to slow down to 50 bp in September and November and up to 25 bp in December.
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Written by Arthur Idiatulin
Arthur is a stock market and currency expert with a vast experience in market research and investment consulting. Dedicated Forex trader and financial practitioner, keen on testing new trading techniques and investment strategies.
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