OPINION
Market Rating Before FOMC MeetingJan 31
All Eyes Are on Nonfarm Payrolls in Markets
Investors in international markets focused on the labor force statistics that will be announced today, which is decisive in the monetary tightening momentum of the US Federal Reserve (FED).
In the report to be published by the Bureau of Labor Statistics (BoLS), affiliated with the US Department of Labor, for September, market expectations for nonfarm payrolls (NFP) are for an increase of 250 thousand.
The recession risks faced by the world's largest economy are creating market pressure in the process of the FED's fight against inflation. The damage caused by the pandemic and the war in Ukraine to supply chains and volatility in commodity markets increases the likelihood of recession for the US economy in the FED's aggressive monetary tightening cycle.
As a matter of fact, the US economy has entered an economic recession, shrinking by 0.6 quarter-on-quarter after the negative 1.6% gross domestic product (GDP) in the first quarter. Leading indicators for the third quarter point out that the economic contraction continues by downshifting.
As reported by IHS Markit and S&P Global, the composite purchasing managers index (PMI), which is the leading indicator of economic performance in the country, remained below the threshold of 50 with 49.5 points level in September. The data, which was 44.6 points in the previous month, thus signaled that economic activity contracted by losing momentum. In this period, as the leading sectors of the economy, manufacturing PMI maintained its strong course with 52 points, while services PMI came in at 49.3 points.
At this point, it is known that the FED is trying to make a soft landing possible without suffocating the economy. In other words, the possibility of a 50-75 basis point interest rate hike for the November meeting of the FED, which is trying to fight inflation without causing a dramatic contraction in the US economy, is tried to be formed in this balance.
As a matter of fact, the labor market continues to be a critical indicator for the FED. Strict labor conditions may alleviate the FED's bill for reducing persistently high inflation. In other words, it is critical that the labor market remains strong so that headline inflation, which fell to 8.5% and 8.1% in July and August, respectively, after reaching its highest level since 1981 at 9.1% on an annual basis last June, hits the 2% target path.
In this sense, if the NFP to be announced meets the expectations for an increase of 250 thousand, it may fix the forecasts for the Federal Open Market Committee (FOMC) meeting on November 1-2 at 75 basis points, creating the expectation that the FED will stick to the aggressive rate hikes. This, in turn, may create a new wave of sales in the bond market and increase the demand for the dollar, which will increase its pressure on major country currencies and assets with high-risk sensitivity. On the other hand, if NFP remains below the estimates of 250 thousand, it may damage the FOMC's soft landing scenarios and may create a reaction, especially on the ounce gold and stock markets. In the September period, an increase of 3.7% is expected for the unemployment rate and average hourly revenues are expected to increase by 5.2% annually.
