The rush in the markets after the Fed minutes has somewhat subsided and investors are turning their eye on the release of US labor market data today. According to the consensus forecast, the economy added 400K jobs while wages rose 0.4% on a monthly basis. The ADP report released on Wednesday, which more than doubled the forecast (807K job growth), laid the groundwork for expectations of a positive surprise today. However, the ISM Service PMI was disappointing yesterday, where the headline reading fell short of expectations, but remained strong (62 points), the hiring sub-index was also below forecasts (54.9 points versus 56.5 expectations). The sub-index of prices paid remained near multi-year highs (82.5 points). The key parameter in terms of the implications for the Fed's policy is wage growth, since the Central Bank is now concerned about inflation, and wage inflation is seen as one of the precursors of the growth of consumer prices. The lack of job growth relative to the forecast and strong growth in wages will most likely not change the expectations regarding the March Fed rate hike, which odds are now estimated by the market at about 66%:
The chances of a rate hike almost doubled after the release of minutes from the Fed's December meeting.
A weak Payrolls reading, combined with sluggish wage growth, could trigger a situation where early signs of a slowdown in the economy coincide with a hawkish shift in Fed rhetoric, which could worsen growth expectations and put risk assets at risk. Weak labor data have a positive effect on risk assets when there are expectations of slowdown and recession and expectations that the Fed is on an easing path. Now the situation is different, so the market will interpret the effect of a negative report on the labor market as it is, and not vice versa.
In favor of the strong Payrolls report is the important fact that the slowdown in activity due to Omicron began in the second half of December, while the collection of statistics for the NFP ended on December 18th.
The German inflation report surprised yesterday, providing significant support to the euro. Expectations that inflation will recede were not confirmed. The headline inflation rate was 5.3% YoY against the forecast of 5.1%, the spread between short US and German bonds retreated from the recent local high, given the fact that the outlook for accelerating inflation in both countries have somewhat leveled off:
Also, the European currency was supported by the data for the EU bloc: core inflation beat forecasts rising to 2.6% YOY, retail sales grew much faster than expected - 7.8% against the forecast of 5.6%.