US labor market data and ECB address are in focus today

Most European and U.S. indexes rose this week. Many investors are wondering why the market is soaring as recession talk grows louder.

The most plausible explanation is good old "bad news is good news" rhetoric: the outlook for global growth has weakened to the point that even the tabloids are publicizing it.

However, two Fed members said yesterday they would support a 75 basis point hike at the next FOMC meeting, but dismissed fears of an economic downturn.

The S&P 500 rallied 1.5%, while the Nasdaq gained more than 2%. However, the 2-10 year portion of the U.S. yield curve remained inverted and volatility remains relatively high, meaning gains could reverse at any time.

Today, the latest labor market data will be released in the United States. For more than a year, inflation data has stolen the spotlight from labor market data and set Fed expectations. And with the number of job openings remaining above 11 million, there is reason to believe that people looking for a job will be able to get one. Therefore, labor market data will certainly not be critical to the Fed's decision-making process in the near term. However, as recession talk takes center stage, investors are increasingly focused on the employment numbers. The U.S. economy is expected to have added more than 250,000 jobs in June, a strong number for the pre-pandemic period, and the unemployment rate is seen stable at 3.6%.

US economy / Fed policy

A strong reading could generate two ideas. 1. the idea that the U.S. economy may be experiencing slack despite tighter Fed policy, or 2. the idea that the Fed would allow itself to become more aggressive in fighting inflation.

A significantly lower-than-expected NFP reading, on the other hand, could confirm that 1. the slowdown has begun and the labor market may not be rate hike-proof, or 2. the Fed could soften its tone if it concludes that the economy is not strong enough to withstand two large rate hikes in a row after all.

In either case, there is a lot of room for interpretation by the markets; it is hard to predict which way the market will go.

However, we will see if Jerome Powell, who believes that the U.S. labor market is strong enough to withstand the rate hikes, is right or if he is once again behind the curve.

Euro Meltdown

The US dollar index is consolidating at a 20-year high, putting further pressure on its G10 and EM counterparts. The EURUSD slipped to 1.0150 as euro bears continue to call the shots in the market despite encouraging minutes from the European Central Bank (ECB).

The minutes indicate that there was "agreement that gradualism should not necessarily be interpreted as slow action in small steps." That's baloney. What we can glean from yesterday's ECB minutes, however, is that there could be a 50 basis point hike at this month's meeting and that central bankers are talking heads.

It is likely that euro skeptics will continue to push for a further drop to parity against the dollar. Until we see the 50 basis point hike, as a stronger than expected ECB hike should also come with a convincing performance. However, the appearance could be subject to political and legal constraints. And disbelief that the ECB will be able to avoid a debt crisis and raise rates will keep the euro under pressure and cause bulls to ignore the Positive ECB statements.

Alternavest Inside

It is likely that euro skeptics will continue to push for a further drop to parity against the dollar. Until we see the 50 basis point increase, as a stronger than expected ECB hike should also be accompanied by a convincing performance. However, the appearance could be subject to political and legal constraints. And disbelief that the ECB will be able to avoid a debt crisis and raise rates will keep the euro under pressure and cause bulls to ignore the Positive ECB statements.

inside-alternavest.article.publishedAt 08.07.2022
inside-alternavest.article.on Alternavest.com