US Federal Reserve won't flinch as labour market starts tailing off

US Fed will take the data in stride as it prepares to keep boosting interest rates and wait for a more-sustained cooling in job growth to help moderate wage gains and inflation

The upcoming US jobs report is projected to show the labor market, while still tight, may be starting to transition to more moderate payrolls growth from out-sized monthly advances.  

Payrolls probably increased by about 325,000 in May after rising 428,000 in each of the previous two months, according to the median estimate in a Bloomberg survey of economists ahead of Friday’s report. While still robust, the projected advance would be the smallest in just over a year.

The unemployment rate is seen falling to a pandemic low of 3.5 per cent, and average hourly earnings are forecast to rise 0.4 per cent from a month earlier. 

Federal Reserve policy makers will probably take the data in stride as they prepare to keep boosting interest rates and wait for a more-sustained cooling in job growth to help moderate wage gains and inflation.

“The tentative signs that payroll growth is slowing and wage growth is falling are not going to be enough to convince the Fed to back away from their planned series of 50bp rate hikes at the next couple of meetings,” Michael Pearce, senior US economist at Capital Economics, said in a note. 

Nonetheless, “a continued slowdown in payrolls and wage growth will eventually convince officials to slow the pace of tightening by the fall,” he said. 

What Bloomberg Economics Says:

“The risk of a recession in the second half of 2023 is high and rising. Of course, the one entity that can turn sentiment around is the Fed. Markets are chattering that the Fed will pause its rate hikes in September, but we think that would be premature. In our scenario for a dovish Fed turn, it would happen only at the end of the year.”

--Anna Wong, Yelena Shulyatyeva, Andrew Husby and Eliza Winger, economists. For full analysis, click here

Christopher Waller, James Bullard and Loretta Mester are among the Fed officials slated to speak in the coming week about the US economic outlook. The central bank on Wednesday will issue its latest Beige Book -- a region-by-region assessment of recent economic activity. 

The economic calendar for the week ahead also includes data on job openings in April, which will offer a hint at whether labor demand is starting to simmer down. Other figures include May surveys of purchasing managers in manufacturing and services, and a report on consumer confidence. 

Elsewhere, a prospective half-point rate increase in Canada, another record reading of euro-zone inflation, and slowing Brazilian growth may be among highlights. 

Canada

The Bank of Canada is expected to continue its aggressive rate-hiking cycle on Wednesday as it scrambles to rush policy settings back to more neutral levels. 

Markets and most economists expect a second straight half-percentage point increase that would take the central bank’s benchmark overnight rate to 1.5 per cent.

A third 50 basis-point hike is expected in July, before the Bank of Canada slows down the pace of tightening toward the end of the year, at which time officials are hoping the inflation scare will be in the rear-view mirror.

Asia

China’s purchasing managers indexes may show some improvement in May from April’s slump. With the nation’s leaders becoming increasingly concerned over the outlook, there’s likely to be close scrutiny of forward-looking sub indexes. 

India’s economy probably expanded more slowly than previously estimated in the year through March as a third wave of Covid and the war in Ukraine arrested momentum.

Australia’s new Prime Minister Anthony Albanese finds out this week how the economy he’s inherited performed in the first quarter. Gross domestic product is expected to have slowed as floods and omicron weighed, though the bigger concern going forward is how inflation will hit household budgets and consumption, and how the government will respond. 

Capital spending figures in Japan will signal whether revised GDP figures will show a larger contraction or not. A slew of production and sales data for April will gauge the initial strength of the rebound. 

Still, Bank of Japan speakers are likely to reinforce the message that the central bank must keep easing, even with inflation above 2 per cent. 

South Korean trade figures may point to a slowing in global demand and the impact of supply-chain snags in locked-down parts of China. Korean inflation due on Friday is likely to accelerate. The Bank of Korea has already flagged price growth will rise above 5 per cent in coming months after hiking rates at its last meeting.

Europe, Middle East, Africa

A new record for euro-zone inflation, mirrored by a 14-month low in economic confidence, may be among the data highlights for the last full week before the European Central Bank’s crucial June rate decision. 

With a pre-meeting blackout period due to begin on Thursday, final comments by several Governing Council officials will draw attention. They include the central bank governors of France, Italy, Spain and Ireland, along with ECB Chief Economist Philip Lane. 

Elsewhere in Europe, the ECB’s verdict on Croatia’s application for entry to the euro area could pave the way for a subsequent decision by governments to allow the first expansion of the currency zone since 2015. 

Hungary’s central bank will set monthly and weekly rates just as it faces pressure to help stabilize markets after Prime Minister Viktor Orban’s windfall tax plan hammered local assets. 

Meanwhile, the Czech government will debate $400 million in financial aid to families, and Romania’s ruling coalition may also unveil a new stimulus package to help low-income earners. 

Turkish data due Friday is expected to show faster price gains in May. Annual inflation has already hit 70 per cent.

Kenya’s central bank is expected to leave rates unchanged on Monday as it looks beyond surging prices and a weakening shilling to support lending before presidential elections. Angola’s monetary authority on Tuesday is also likely to keep borrowing costs steady as a rally in the kwanza helps rein in inflation. 

South African data Tuesday will probably show unemployment fell for the first time since 2020 to 35 per cent in the first quarter as more respondents from the economic hub of Gauteng participated in the labor force survey, and a surge in commodity prices helped spur a recovery in economic growth. 

Latin America

Mexico’s central bank on Wednesday freshens a host of key scenarios and forecasts in its quarterly inflation report. Banxico in its March report cut its 2022 GDP forecast to 2.4 per cent from 3.2 per cent, and is likely to do so again.

Unemployment data for April from Brazil, Chile, Colombia and Mexico may show additional marginal improvement from their March readings amid soft participation rates.

In Brazil, analysts expect the country’s broadest measure of inflation to have slowed for a 12th month in May while failing to break below 10 per cent.

On Thursday, first-quarter data are expected to show that Brazil’s economy slowed from the modest expansion seen in last three months of 2021. Given abundant headwinds, look for slow growth into 2023.

In Peru, prices are still on the way up with analysts expecting inflation in Lima, the country’s megacity capital, to have jumped again in May. 

In Chile, the run-off of last year’s stimulus and investment sidelined by the ongoing constitutional reform suggest a lower reading for April’s GDP-proxy data.