Last Friday, Nonfarm Payrolls increased by 528,000 in July, beating the market expectation of 250,000. Average Hourly Earnings remained unchanged at 5.2%, and more good news followed, with the unemployment rate dropping to 3.5%. The positive information represents a strong sign for the US labour market, which boosted market expectations for a big 75bps rate hike next September, and with it, the dollar rallied.
Outside of the data, Fed members hinted at their thinking, with speaker Daly stating the Fed’s work on inflation is “nowhere near almost done”. Evans said he sees rates at 3.25-3.50% by year-end plus another 2-3 rate hikes of 0.25% next year. Finally, Mester reiterated that the Fed’s primary goal is to get inflation under control even at the cost of growth.
Over in Europe, the EUR had a relatively quiet week but lost ground against the Dollar and is still sitting under 1.02. No significant moves have broken the EUR downtrend yet, and with the more rate hike expected from the FED, the EUR’s brief rebound looks to be slowing. Eurozone retail sales were also disappointing, falling by 1.2% in July, but German industrial production unexpectedly grew by 0.4% on Friday. The narrative remains the same. The ECB cannot solve Europe’s problems (War, Energy, Italy).
The next UK PM’s potential economic challenges are significant. Over in Britain, the Bank of England increased interest rates again, with a historical 0.50% increase, not seen since 1995. This pushed the UK’s interest rates up to 1.75%, the highest interest rate since the 2008 financial crisis and marked the 6th consecutive rate hike the BoE has delivered. BoE chief Andrew Bailey also stated that the annual inflation rate is set to climb above 13 per cent in October when the energy price cap is lifted, which would mean the UK has one of the highest inflation rates among the G7. Still, worse news came as the BoE predicted that the UK would be in a recession by Q4 of this year and would likely last until 2024.
What to watch this week:
Wednesday
USD – Consumer Price Index ex Food & Energy
Thursday
USD – Jobless Claims
Friday
GBP – Gross Domestic Product
USD – Michigan Consumer Sentiment Index