Key events in developed markets next week

The coming week will be a big one for US data given the Federal Reserve has indicated it is now far more open to the idea of scaling back its policy stimulus measures. With inflation pressures looking set to remain elevated for longer than policymakers initially thought and the economy continuing to boom, the main disappointment is the slower than hoped for recovery in jobs. This will make the June US labour report the key focus for markets next week.

With the reopening well under way, demand for workers is intense yet we have had much weaker than expected jobs numbers. This has been attributed to four key factors. Firstly, many schools are on remote learning, forcing parents to stay at home as well. Secondly, there is still some hesitancy to return to work from some people given the pandemic is ongoing. Thirdly, many people who lost their jobs may have chosen to take early retirement, particularly with surging equity markets having boosted pension pots. Then fourthly we have the extended and uprated Federal unemployment benefits that may have diminished the financial attractiveness of returning to work.

More than half the states have, or are in the process of ending this benefit payment so we may start to see some potential workers soon return to work. However, we strongly suspect that labour market strains will linger for several more months given we are now entering school summer holiday season and for most people the Federal benefits will continue through to September.

Consequently, while we expect to see a decent employment growth figure in the range of 500-600,000 next Friday, total employment will remain more than six million lower than before the pandemic struck. Nonetheless, the demand is clearly there for workers so we suspect wage rates will continue ticking higher. With more Fed officials hinting that the US economy may be closer to full employment than seemed likely a few months ago we think the next key Fed policy hint will be at the August Jackson Hole conference. This could pave the way for a formal QE asset purchase tapering announcement before year-end.

Other numbers will include the ISM report and consumer confidence. Both should hold at firm levels with the former again highlighting the supply chain strains that are putting up costs and boosting the chances that inflation stays higher for longer.

With inflation set to remain fairly muted over the coming years, the Riksbank is likely to be one of the latter central banks in the developed market arena to hike interest rates after the Covid-19 crisis. Policymakers are signalling no rate rises over the policy horizon out to 2024, and there’s been little change on the macro front since the last meeting to suggest any major changes to that view at next week’s meeting.