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LGT Navigator: US labor market development – decisive factor for Fed policy

July 8, 2022

Developments on the labor market play a decisive role in the monetary policy stance of the Federal Reserve. Against this background, the monthly labor market statistics from Washington will be the focus of attention today. In the run-up, recession worries receded somewhat into the background and the stock indices on Wall Street continued to stabilize. At the meeting of the foreign ministers of the G20 countries in Indonesia, the Ukraine war and the conflict between the West and Russia are the main focus, but also the global food and energy security.

US labor market development – decisive factor for Fed policy

The Dow Jones Industrial closed +1.12% higher at 31,384.55 points on Thursday and the S&P 500 gained +1.5% to 3,902.62 points. This leaves the S&P 500 just under 20% below its record high in January. The technology stocks on the Nasdaq gained about +2% yesterday but are thus almost 30% below the high of November 2021. Among other things, a media report that the planned acquisition of the news service Twitter by the tech billionaire Elon Musk threatens to burst caused attention. The Twitter shares briefly collapsed by more than -7%.

In Asia, the stock market indices trend higher at the end of the week, led by Tokyo. The Nikkei 225 trades around +0.75% higher. In Hong Kong and Shanghai, however, the daily gains remained more moderate.

In bond markets, the yield of ten-year Treasuries climbed back above the 3% mark and in foreign exchange trading, the euro fell against the US dollar below the 1.02 mark to 1.0160.

US labor market report in focus

Employment in the US is expected to have risen strongly again in May. The analyst consensus is for growth of 390,000 jobs and sees the unemployment rate at 3.6%, just above the pre-pandemic low of 3.5%. If the labor market proves robust, this should encourage the Federal Reserve (Fed) in its intention to raise key interest rates further. To contain inflation, the Fed will try to curb demand for labor without pushing the unemployment rate too high. The weekly labor market data released yesterday showed an increase in initial jobless claims, but the level of claims has been low for quite some time, indicating that the job market remains solid.

ECB on delicate mission – minutes reaffirm prospect of interest rate turnaround

According to the ECB meeting minutes released yesterday, the door remains open for a "big" first rate move on July 21. It seems that opinions have not yet been made. The ECB is even more than the Fed in the dilemma confronted by a potential energy crisis in Europe and the risk that the turnaround in monetary policy is tipping the already fragile economy into recession. ECB chief Christine Lagarde has not yet committed herself to fighting inflation as consistently as Fed Chairman Jerome Powell has, but there are growing indications that inflation is stuck at a high level or even rising further against the backdrop of the massive increase in energy costs.

Risk of global recession has increased significantly, according to IMF

In view of the increased risks, the head of the International Monetary Fund (IMF), Kristalina Georgieva, no longer wants to rule out a global recession next year. At present, the IMF still expects the global economy to grow by +3.6% in the current year. However, this forecast is likely to be revised downward again at the end of July. By comparison, global GDP growth in 2021 was still +6.1%. The outlook has deteriorated significantly since the last update in April against the backdrop of inflation, tighter monetary policy, slowing economic growth in China and the consequences of the Ukraine war, the IMF chair stressed. To restore price stability, slower economic growth may be a “necessary price.” At the same time, the risk of divergence between fiscal and monetary policy had increased. In this regard, it is important to prevent central bank measures to control inflation from being undermined by fiscal support, Georgieva stressed.

Economic Indicators July 8

MEZ Country Indicator Last period
10:00 IT Industrial Production (May, m/m) +1.6%
13:55 EZ ECB President Lagarde speaks
14:30 US Unemployment Rate (June) 3.6%
14:30 US Non-Farm Payrolls (June) +390,000
14:30 US Average Hourly Earsnings (June, y/y) +5.2%

 

Earnings Calender July 12

Country Company Period
US Pepsico Q2

 

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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