The US job report showed a surprise decline of 23,000 jobs in July, while previous data was revised down by 103,000. This paints a weaker picture of growth in the US economy but also a picture more in line with the stagnation in the labour force which is reducing the growth potential. Hence, the unemployment rate declined to 4.1% in July despite declining employment. Of course, not too much should be read into a single month of volatile data, and July was influenced by a large drop in public sector employment as well as possibly an effect from the end of the football world cup. Still, we expect to see more job reports like this and the implication is not that monetary policy is too tight, as it is a lack of supply that is constraining job growth.
So, while the weaker employment data is not in itself an argument for the Fed to postpone or even drop rate hikes as we see it, there is more support for that in other data. Average hourly earnings grew only 0.1% in July, which is both an indication that low unemployment is not leading to wage inflation and also points to the risk that US private consumption growth might not be sustainable.
Actual inflation data for July came out as expected with a 0.1% m/m increase in headline CPI and 0.2% excluding food and energy. Annual headline inflation remains too high at 3.4% and means that wage earners are experiencing stagnating spending power at best, and core inflation is a bit higher than the inflation target of two percent would suggest. Still, the July numbers do not signal an urgent need for policy action, and PPI inflation was also lower than expected in July. All in all, we see the chance of a rate hike in September as having declined but we continue to expect the hike to come in December. Keep in mind that we will receive both CPI and labour market data for August before the September meeting, and those data points can of course change the picture.
Oil prices rose around USD 4 per barrel during the week, while the spread to product prices such as gasoline and diesel remain very elevated, as there seems to be more bad than good news regarding a true reopening of the Strait of Hormuz. However, we still do not see many signs that the increase in energy prices since February is causing more widespread inflation around the world.
The most interesting data release in the coming week is likely to be the preliminary August PMIs for the major economies due on Friday. Not least in the euro area, where the July release was surprisingly strong with a composite PMI of 52.0, indicating decent growth and signalling that there is room for another rate hike. On the other hand, PMIs have generally shown less and less pressure for broad price increases following the higher energy prices, indicating that rate hikes might not be needed. Friday will also give the first indication of euro area wage growth in Q2, also an important piece in the inflation and interest rate puzzle. The Japanese economy is attracting extra attention following last week’s intervention from both Japan and the US to support the JPY. The currency would be easier to support if the Bank of Japan were to hike rates, and growth and inflation data this week could give a clue as to the prospect of that.
