Strong US employment data for the month of July, has given the Federal Reserve a greater reason to continue on its path of tighter monetary policy. Nonfarm payrolls increased by 209,000 jobs in July beating market expectations of an 180,000 jobs print, while June’s employment gain was revised to 231,000 from the previously reported 222,000. The unemployment rate dropped to 4.3%, a 16-year low. The market also got a lift from trade data that indicated a 6% drop in the trade deficit.
The data largely gives ways to the markets’ expectations that the Fed will start to reduce its $4.2 trillion balance sheet at its September meeting and raise rates again in December.
The U.S. dollar, Treasury rates, and domestic stock markets all rallied on the back of the data. The ten-year moved up four basis points closing last week at 2.26%, however, still .03% lower than the previous week. The S&P and Dow were both up last week, with the Dow gaining 1.2%, giving way to an 11.8% increase year-to-date.
While the unemployment data remained strong, sluggish wage growth has created some concerns that a lack of inflation could stymie the Fed’s efforts to raise interest rates. In her recent testimony before Congress, Fed Chairwoman Yellen focused on inflation. The Fed’s inflation target is 2% and the preferred measure of inflation (PCE) is at about 1.5%. Hence, all eyes will be on inflation data to be released next week, with PPI (Thursday) and CPI (Friday) data.
Other market moving economic data includes JOLTS Job Openings (Tuesday) and crude oil inventories (Wednesday).
There is a slew of dovish Fed speakers on deck this coming week, including James Bullard (Monday), Neel Kashkari (Monday and Friday), Charles Evans (Wednesday), William Dudley (Thursday) and Robert Kaplan (Friday).
Key data overseas will be relatively light but will include: The Reserve Bank of New Zealand meeting on Wednesday with its governor speaking publicly right after. U.K. manufacturing data will also be released on Wednesday.
