Will an ugly job report deter the Fed from aggressive rate hikes?

Will an ugly job report deter the Fed from aggressive rate hikes?

Employment in the United States is expected to decline in January, with some economists warning that the economy is losing jobs as the fallout from the Omicron coronavirus wave became more widespread.

The U.S. economy is expected to have added 175,000 jobs at the start of the year compared to 199,000 in December, the Department of Labor is expected to announce Friday. Unemployment is expected to remain stable at 3.9 percent, according to Bloomberg estimates. The average hourly wage is expected to rise 5.2 percent compared to a year ago against 4.7 percent in December.

However, economists continue to revise their estimates, and some warn that there is a risk, payslips entered into in January, when the highly transferable Omicron variant hit the leisure and hospitality, health and other service-related industries.

Economists at Jefferies note a “high probability” of negative pressure, while those at Pantheon Macroeconomics have predicted that the United States will lose 300,000 jobs.

“The jobs report will not do much to change the Federal Reserve’s positive outlook on the labor market,” said Lydia Boussour, senior U.S. economist at Oxford Economics.

The Fed is fully focused on curbing violent inflation, and Fed Chairman Jay Powell said this week: “I think there is a lot of room for raising interest rates without threatening the labor market.”

“Fed officials see a very tight labor market and they are likely to see through the temporary weakness in job creation,” Boussour said. Mamta Bathtub

Will the Bank of England start winding down its bond buying program?

The Bank of England is generally expected to raise interest rates for the second month in a row at its meeting this week. This means that investors are looking at an increase in borrowing costs to 0.5 per cent – which is broadly priced by the markets – to see if this triggers the start of the process of liquidating the central bank’s portfolio of DKK 875 billion. pounds of government debt purchased under its quantitative easing programs.

Back in August, when it laid out its strategy for tightening monetary policy in the wake of the coronavirus pandemic, the BoE signaled that it would begin to shrink its balance sheet when interest rates reached half a percent. It would do so by not stopping the reinvestment of the proceeds of bonds which it holds when they mature, “if appropriate in the light of the economic circumstances”.

With a dramatic rise in inflation since last summer, the moment looks set to come faster than investors or the BoE themselves expected.

If BoE ratepayers decide a rate hike is appropriate, they will likely consider it appropriate to start winding down QE as well, according to Nomura economist George Buckley.

“With Governor Bailey’s previously expressed desire to reduce the balance, a move sooner rather than later seems reasonable,” Buckley said. This would mean that the process of so-called “quantitative easing” would begin in March, when a £ 28 billion gold reserves held by the central bank fall due.

However, there is still a chance that the BoE will get “cold feet,” said Ruth Gregory of Capital Economics. It may also dilute its previous guidance that it will “consider” actively selling bonds in its portfolio when prices reach 1 percent, according to Gregory.

“This would feel like a pigeon-like development,” she said. Tommy Stubbington

Will the ECB signal changes in monetary policy at its January meeting?

Many economists do not expect a policy change from the European Central Bank at its first political meeting in 2022 on Thursday, despite the eurozone facing rising inflation.

The time for a possible rate hike at the ECB “has not come yet,” said Carsten Brzeski, global macro chief at ING.

He pointed out that the Federal Reserve has moved closer to its first rate hike in the pandemic, but the U.S. economy had already expanded well above what it produced when the health crisis hit.

In contrast, the eurozone economy is expected to have just recovered around pre-pandemic levels in the fourth quarter, with data released on Monday.

This week’s ECB meeting is unlikely to bring any political changes, Brzeski noted. “Instead, the central bank will have to master a new communication challenge regarding inflation: to avoid any apparent shift from patience to panic,” Brzeski added.

Similarly, George Buckley, an economist at Nomura, does not expect any major changes in policy or guidance, and believes that the ECB will be able to begin a slow normalization of political interest rates from June 2023. But “the risks are on the upside of Our interest rate outlook, ”warned Buckley.

Eurozone inflation rose at an annual rate of 5%. in December, the highest since the creation of the euro and more than double the ECB’s target of 2%. The ECB expects the inflation peak to be passed during the fourth quarter.

Ellec Henderson, an economist at Investec, said Wednesday’s release of a flash estimate for January’s harmonized consumer price indices “will give a first clue” as to whether this forecast “plays out.” Valentina Romei

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