The week ahead: US non-farm payrolls, US and China manufacturing data 

Patrick Harker announced he does not want to aggressively lift rates, only to cut them shortly later. Harker went on to say his is undecided about a 50-basis points or a 75-basis points hike. James Bullard warned that inflation will be higher for longer. Mr Bullard also revealed he likes the idea of “front loading” interest rate hikes, and that could be a sign he is pushing for another 0.75% lift next month. US stock markets rallied on Thursday as the US 10-year yield cooled to 3.02%. The US dollar went on a bullish run during the week, and it drove EUR/USD to a new 20-year low. Europe continues to be dogged by high energy prices, and it comes at a time when economic activity in the region is moving down a gear. The latest eurozone services and manufacturing reports were the weakest in 17 months and 26 months, respectively. Jerome Powell will deliver his speech at Jackson on Friday 26 August, and that could easily spark volatility in the markets. 

Looking to the week ahead, the US non-farm payrolls report will be the most closely watched event. In the past few weeks, the US has revealed a few disappointing economic updates, but the standout positive announcement was the latest jobs report. It showed that 528,000 jobs were added in July, easily beating the 250,000 that economists were expecting. The June report was revised from 372,000 to 398,000. Also, the unemployment rate slipped to a new two-year low of 3.5%. Overall, it was a great report, and some traders took the view the Fed might use it as an excuse to press ahead with another 0.75% interest rate hike in September. Since the pandemic, the Fed have taken very robust action in relation to supporting the economy, and that has worked judging by the most recent job report. As a consequence of the bank’s extremely loose monetary policy, the inflation rate soared. CPI has cooled to 8.5%, but it is still way above the 2% target. Traders will be analysing the jobs data and trying to decipher whether the US central bank will lift rates by 50-basis points or by 75-basis points at the September meeting. Although some of the data from the US has been disappointing recently, last week, Neel Kashkari, Fed member, reiterated the point the Fed are determined to bring down inflation. 

The US and China will publish manufacturing data on Thursday. The US ISM manufacturing report is very detailed and therefore it can provide lot of useful inflation. Last month’s report was more downbeat than the headline figure suggests as it only fell to 52.8 from 53. The new orders component edged lower from 49.2 to 48, and the prices paid metric slumped from 78.5 to 60 – the major fall could be an early indication that inflation has peaked. A reading of 50.0 or above notes an expansion, while reading of 50.0 or below indicates a contraction, so even though the sector is growing at a modest pace, it is worrying that new orders fell deeper into contraction territory – implying that demand is falling. On the bright side, the major fall in prices paid should remove some of the inflationary pressure that is looming over the US economy. If prices in the manufacturing sector continue to fall, that could act as a leading indicator for CPI, and keep in mind the Fed are fixated on inflation. The Caixin survey of Chinese manufacturing is deemed to be a more objective view of activity. The latest reading was 50.4, but it is worth noting that three of the previous four updates were in contraction territory. China’s localised lockdowns in Spring caused major disruption to their economy and the impact is still being felt. 

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