Summer trading will bring a shift in financial market’s focus from inflation to job creation. Now that the Fed started “thinking about thinking” about tapering, progress in the jobs market will drive the price action until the September Fed meeting.
The main event of the last week surprised market participants. The Federal Reserve of the United States (Fed), the most proactive central bank in the world, announced that it is “thinking of thinking” about tapering the asset purchases later in the year.
Moreover, it increased the interest rate on excess reserves and signaled two possible rate hikes in 2023. The hawkish tone was unexpected, and most market participants believe that higher inflation than the Fed forecast led to the shift in language.
Fast forward to this week, and the Fed downplayed last week’s message. It said that it would keep the accommodative measures for as long as needed. But how long is too long, and what is the Fed’s threshold?
Job Posting in the United States Already Above Pre-Pandemic Levels
If the Fed is uncomfortable with the level of inflation, it means its threshold for that part of the mandate was reached. The focus, therefore, shifts to job creation.
While still a long way to full recovery to pre-pandemic levels, some encouraging signs exist for the bullish US dollar trader. First, job postings in the United States have already exceeded pre-pandemic levels. The April JOLTS (Job Openings and Labour Turnover Survey) report showed 9.3 million job openings for the month.
Second, employment expectations are picking up in more parts of the economy. The Richmond Fed manufacturing survey shows that employment expectations are strong in the Richmond Fed District. In June, employment expectations rose to a record level of 51, suggesting that factory employment will likely accelerate in the months ahead.
Stronger job creation should put further pressure on the Fed to react sooner rather than later and taper its asset purchases. Next week, the Non-Farm Payrolls report on Friday is the first big test for the markets.
On a better than expected report, stocks will rally. But on a much better than expected report, the US dollar should rally, as the Fed is obliged to act.