Will an ugly jobs report deter the Fed from aggressive rate rises?

Will an ugly jobs report deter the Fed from aggressive rate rises?

Hiring in the US is expected to have slowed in January, with some economists cautioning that the economy shed jobs as the fallout from the Omicron coronavirus wave became more widespread.

The US economy is projected to have added 175,000 jobs at the start of the year, compared with 199,000 in December, the labour department is expected to say on Friday. The unemployment rate is forecast to hold steady at 3.9 per cent, according to Bloomberg estimates. Average hourly earnings are expected to rise 5.2 per cent from a year ago, compared with 4.7 per cent in December.

However, economists are continuing to revise their estimates and some caution that there is a risk payrolls contracted in January as the highly transmissible Omicron variant hit leisure and hospitality, healthcare and other service-related industries.

Economists at Jefferies note a “high probability” of a negative print, while those at Pantheon Macroeconomics have predicted the US will shed 300,000 jobs.

“The jobs report won’t do much to alter the Federal Reserve’s bullish view on the labour market,” Lydia Boussour, senior US economist at Oxford Economics, said.

The Fed is squarely focused on tamping down on rampant inflation and Fed chair Jay Powell this week said, “I think there’s quite a bit of room to raise interest rates without threatening the labour market.”

“Fed officials see a very tight labour market and they are likely to look through the temporary weakness in job creation,” Boussour said. Mamta Badkar

Will the Bank of England start unwinding its bond-buying programme?

The Bank of England is widely expected to raise interest rates for a second consecutive month at its meeting this week. That means investors are looking beyond an increase in borrowing costs to 0.5 per cent — which is broadly priced in by markets — to see whether this triggers the start of the process of winding down the central bank’s £875bn holdings of government debt purchased under its quantitative easing programmes.

Back in August, when it laid out its strategy for tightening monetary policy in the wake of the coronavirus pandemic, the BoE signalled it would begin to shrink its balance sheet when rates reached half a per cent. It would do so by not stopping the reinvestment of the proceeds of bonds that it holds as they mature, “if appropriate given the economic circumstances”.

With a dramatic surge in inflation since last summer, that moment looks poised to arrive sooner than investors, or the BoE itself, expected.

If BoE rate-setters decide a rate rise is appropriate, they are likely to judge that starting to unwind QE is appropriate too, according to Nomura economist George Buckley.

“With governor Bailey’s previously expressed desire to reduce the balance sheet, a move sooner rather than later seems reasonable,” Buckley said. That would mean the process of so-called “quantitative tightening” would begin in March, when a £28bn gilt held by the central bank falls due.

There is still a chance, however, that the BoE gets “cold feet”, said Ruth Gregory of Capital Economics. It could also water down its previous guidance that it will “consider” actively selling bonds in its portfolio once rates reach 1 per cent, according to Gregory.

“This would feel like a dovish development,” she said. Tommy Stubbington

Will the ECB signal any changes to monetary policy at its January meeting?

Many economists expect no policy change from the European Central Bank at its first 2022 policy meeting on Thursday, despite the eurozone facing surging inflation.

The time for a possible rate hike at the ECB “has not come, yet,” said Carsten Brzeski, global head of macro at ING.

He pointed out that the Federal Reserve has moved closer to its first pandemic-era rate rise, but the US economy had already expanded well above what it produced when the health emergency struck.

In contrast, the eurozone economy is expected to have just recovered to about pre-pandemic levels in the fourth quarter, when data is released on Monday.

This week’s ECB meeting is unlikely to bring any policy changes, Brzeski noted. “Instead, the central bank will have to master a new communication challenge regarding inflation: avoiding any apparent shift from patience to panic,” added Brzeski.

George Buckley, economist at Nomura, similarly expects no major changes to policy or guidance, and thinks that the ECB will be in a position to begin a slow normalisation of policy rates from June 2023. But “the risks are on the upside to our rate view,” warned Buckley.

Eurozone inflation rose at an annual rate of 5 per cent in December, its highest since the creation of the euro and over double the ECB’s target of 2 per cent. The ECB expects the inflation peak to have passed during the fourth quarter.

Ellie Henderson, economist at Investec, said that the release on Wednesday of a flash estimate for January’s harmonised indices of consumer prices “will give a first clue” of whether that forecast “is playing out.” Valentina Romei