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US June NFP and FOMC Minutes

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The release of the minutes from the Fed’s last meeting will get extra scrutiny later today, given the ambivalence on forecasts that came out back then. There has been some clarification lately, notably with Fed Chair Jerome Powell’s comments at the Sintra ECB banking conference this week. But investors will likely still want to see what FOMC members were actually thinking.

Markets continue to price in one rate hike for September, and another for December, though there are some strong dissenting minorities. On top of the minutes, the upcoming jobs numbers could be pivotal for those expectations. The consensus is that interest rates will be easing through the course of the year, which would weigh on the dollar. But that’s unless there are any surprises.

Why the Disagreement?

Last month saw inflation come down faster than expected, but the FOMC members tightened their outlook for rate cuts. Before, they expected three cuts this year, and according to the latest dot-plot matrix that records where Fed officials think rates will be, only one rate cut is expected. That’s half as much as the market is expected, and so far the market has been wrong in its Fed forecasts.

So, traders will be looking for some clarification for why the Fed officials got more hawkish at the last meeting despite lower inflation. It could be a reflection of the uptick in headline inflation that occurred during the spring, and has subsequently reversed. That might reassure traders that the cuts are coming as expected. On the other hand, if FOMC members have become less confident on inflation coming down, then the market could shift towards believing that the final rate cut won’t happen this year, giving the dollar a boost.

Labor Markets in Focus

With Powell repeatedly insisting that the Fed is data-dependent, the other thing to care about is the jobs situation. That is because for the last couple of years, low unemployment and a high number of vacancies has pushed up inflation at a rate higher than production. The end result is pro-inflationary pressure.

But so far this year the unemployment rate has trended higher, despite strong jobs numbers. More importantly, average earnings has softened a bit. This will help convince FOMC members that inflationary pressures are receding, and that cutting rates won’t result in the dreaded rebound in the CPI growth figure.

What to Look Out For

The consensus is that the US added 160K jobs last month, which is just below the lower bound of what would normally be considered a “good” jobs report. That would be down from the surprise 229K reported last month, and could contribute to confidence on rate easing later in the year.

The unemployment rate is expected to remain steady at 4.0%, with average hourly earnings continuing its slowing growth rate to 3.6% from 4.1% prior. In general, signs of labor force tightening would likely support the dollar, while signs of loosening would weaken the greenback.

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