Key events in developed markets next week

America will be celebrating Independence Day at the end of the week and we are hopeful that the forthcoming data will bring more cheer. The obvious focus will be the jobs report, which will be published on Thursday due to 3 July being a national holiday. With all states now experiencing some form of reopening, we should see another sizeable pick-up in employment, as workers return to their jobs. We look for payrolls to rise by around 3.5 million, but we have to remember that millions more remain out of work, with Google Mobility data suggesting in many states, especially in populous ones like New York, New Jersey and California, consumer and business activity remains far from normal.

The unemployment rate should move slightly lower, but we caution that this is not a reliable indicator and understates the true rate of joblessness. To be recorded as unemployed by the Bureau for Labour Statistics you have to be actively job hunting, however, given the dislocating effects of the Covid-19 containment measures you do not have to be actively looking to claim benefits. As such, the “true” unemployment rate is likely still around 20%. Average hourly earnings will fall sharply, but this is a statistical effect caused by lots of relatively low earning workers regaining employment, dragging the “average” level of hourly wages lower. It is meaningless.

As for activity, the ISM manufacturing index should bounce sharply, but we must remember that even if it rises to 50, as we expect, that does not suggest growth, as the level of activity is down hugely on where we were at the start of the year.

Despite this positive backdrop we remain somewhat cautious on the outlook given the rising number of Covid-19 cases and the potential for states to pause or even roll back some of their phased reopening plans, which could hurt sentiment and activity. Meanwhile, the timely Homebase jobs numbers suggest employment has softened over the past week or so, which perhaps hints that final demand may not be as strong as we would have liked to see, with businesses needing to “right size” their workforce. And with the $600 Federal boost to weekly unemployment benefit payments scheduled to end in five weeks, we could see a big reduction in household incomes. As such, we expect to hear more talk of additional fiscal support in the coming weeks.

We’ve detected a bit of a policy shift at the Bank of England. The BoE’s decision to taper its quantitative easing purchases was coupled by a comment from Governor Andrew Bailey that he’d prefer to unwind the balance sheet ahead of raising interest rates – a clear departure from the Carney-era guidance that this process wouldn’t occur until the Bank rate hit 2%. While that debate might sound a bit academic at the moment given where we are in the cycle, it does have a couple of more immediate implications. Firstly, it could perhaps sow the odd seed of doubt among some investors about the willingness to significantly ramp up QE again if we were to see another bout of market turmoil (although in the event we suspect policymakers would do so). Secondly, it may help fuel the debate about whether the BoE will adopt negative rates. Policymakers haven’t ruled out doing so, although we still suspect its probably unlikely, at least in the near-term.

We mention all of this because we have a series of policy speeches over the next week, including from BoE Chief Economist Andy Haldane, who recently dissented from the decision to expand QE. Look out for further clues on possible shifting policy preferences.