Why a strong US labour market amid resilient demand may mean aggressive rate increase

Economists say the strength of the US labour market might seal the deal for the Fed to opt for another 75-basis point rate increase in September. Reuters / Jonathan Ernst / File Photo

The last US jobs report ahead of the Federal Reserve’s September policy meeting probably showed employers continued to add jobs at a healthy — albeit more moderate — pace in August, underscoring the durability and strength of the labour market and the need for an aggressive policy response to rein in inflation, according to economists.

Friday’s jobs report is projected to show a 300,000 payrolls increase in August, according to the median estimate in a Bloomberg survey of economists. The unemployment rate is seen holding at 3.5 per cent — matching a five-decade low — while average hourly earnings probably posted another solid gain.

Fed chairman Jerome Powell signalled last week that the US central bank will probably keep raising interest rates and leave them elevated for a while to stamp out inflation. He noted this will probably lead to a softening in labour market conditions and bring some pain to households and businesses.

In the days ahead of jobs report, a slew of other indicators will offer additional insight into the state of the labour market. The government will release July data on vacancies and departures on Tuesday.

Economists expect job openings to remain elevated in the month, indicating resilient demand for labour warranting strong policy response to keep inflation in check.

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

“We expect the pace of hiring to slow in August — but given our expectation of a stagnant labor-force participation rate, it will take very few added jobs for the unemployment rate to edge down. The strength of this report might seal the deal for the Fed to opt for another 75-basis point hike September,” Bloomberg economists Anna Wong, Yelena Shulyatyeva, Andrew Husby and Eliza Winger said in a report.

Elsewhere, euro-area inflation is predicted to hit another record, while China PMIs are predicted to stay weak. In Canada, second-quarter GDP will probably show the expansion losing momentum after a strong first quarter.

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

Trade-reliant South Korea’s industrial production and exports data will give the latest pulse check on the global economic slowdown.

In Japan, industrial production and retail sales data will give clues on how well the recovery in the world’s third-largest economy is progressing. As inflation continues to creep up beyond the Bank of Japan’s target rate, board member Junko Nakagawa will give the latest thinking on policy.

BOJ Governor Haruhiko Kuroda said on Saturday in Jackson Hole that almost all of the country’s inflation is being caused by higher commodities prices and that the central bank must continue with easy monetary policy for now.

“We have no choice other than continued monetary easing until wages and prices rise in a stable and sustainable manner,” Mr Kuroda said.

Australia’s retail sales and house prices data, and New Zealand’s business confidence data, will give insight on the state of both economies as rate hikes look set to continue.

India will report GDP figures on Wednesday that will show a robust recovery in the services sector after a wider re-opening from the pandemic.

Euro-area inflation takes center stage, with economists predicting it will hit 9 per cent when August data is published on Wednesday. In the run-up, the region’s top four economies also publish figures.

Those numbers may convince European Central Bank policy makers to raise borrowing costs by another sizable increase on September 8. While officials have committed to hike costs again, few have indicated publicly how big a move they would like. At least six of them — including Chief Economist Philip Lane — could provide more clarity when they speak before the central bank’s official quiet period kicks in on Thursday.

The inflation situation would be exacerbated if Russian gas gets cut off permanently. Gazprom plans to close the Nord Stream pipeline for three days of maintenance starting Wednesday. There is a worry that flows may not resume after that.

German Finance Minister Christian Lindner said in an interview published on Sunday that the government needs to address soaring power prices “with the utmost urgency”.

The Bank of England may hike by a half point when it meets in mid September. The central bank will release a survey of its own this week, likely to show that corporate decision makers expect inflation to accelerate.

In Hungary, the central bank decides on the base and weekly interest rate, with policy makers expected to deliver hikes as inflation overshoots forecasts and the currency plummets.

Turkish trade-balance figures are expected to show a further widening of the deficit, while second-quarter economic output might be stronger than the 7.3 per cent growth recorded in the first three months of the year.