FOMC minutes and Non-Farm Payroll look-ahead

By David Morrison  |  05/07/2018 13:07

This article looks ahead to tonight’s FOMC Minutes and the latest Non-Farm Payroll update on Friday

Investors are looking ahead to tonight’s release of minutes from the last FOMC meeting and preparing for the latest update on US Non-Farm Payrolls on Friday. All this comes against the expectation that the Trump administration is set to impose 25% tariffs on $34 billion-worth of Chinese imports with more to follow and retaliation expected.

Risk of ‘policy error’

Considering the minutes first. Last month the Fed’s FOMC raised the fed funds rate by a further 25 basis points as expected. This means a new target band of 1.75-2.00%. As this was a quarterly meeting it also brought the release of the FOMC’s Summary of Economic Projections. This indicated that Committee members had become a tad more hawkish with an increased probability of a further two rate hikes expected over the rest of this year. Going out further, the majority of FOMC members expect a fed funds rate above 3.0% by 2020. Fed Chairman Jerome Powell also sounded relatively upbeat when he held his subsequent press conference and reiterated that the US central bank was comfortable with inflation rising above the Fed’s 2% target. But he also emphasised that the Fed wanted to avoid a policy error which would lead the economy into recession (raising rates too quickly) or see a bubble in asset prices (keeping monetary policy too loose for too long).

Economic outlook

Some interpret the Fed rate increases as a positive response to an improving economy. However, there’s also a view that the central bank under Powell is now keeping a close eye on asset valuations and may look to tighten monetary policy if prices appear bubbly. This led to a pull-back in US equities. Tonight’s minutes may give us greater insight into what individual Fed members are thinking about this.

Non-Farm Payrolls

Looking at what to expect from June’s employment data, starting with Non-Farm Payrolls (NFP). Last month the NFP rose by 223,000 which was comfortably above the 190,000 anticipated. There was also a modest upward revision to the previous data. This time analysts are expecting payrolls to dip back below 200,000. Consequently, anything above 200,000 should be dollar-positive, at least in the short-term as this would reinforce the view that the Fed will be comfortable to continue tightening monetary policy at its current expected pace. If we see a number below 180,000 then the dollar should sell off, initially at least. The possible stock market reaction is more complicated. Better-than-expected data will reinforce the view that the US economy is strong and this could see equities catch a bid. However, there’s a danger that traders may worry that the Fed could accelerate its programme of rate hikes which would weigh on business activity going forward. Much will depend on how the bond market behaves as a further flattening of the yield curve looks likely to curb risk appetite.

Yield curve flattening

For the same reasons it’s difficult to predict how equities may respond to a poor (sub-180,000) number. A very weak reading would sow doubts over economic growth going forward. Although this is negative we could see stock indices rally on hopes the Fed will dial back on rate hikes.
In addition, traders must pay close attention to Average Hourly Earnings. This is forecast to come in unchanged at +0.3% month-on-month. But a pick-up here will signal that wage growth is accelerating and that inflationary pressures are building. Bear in mind that January’s unexpected rise in Average Earnings was a precursor to a sharp sell-off across global stock indices.
 
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