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Is the Fed going to keep on fighting inflation?

Will the Fed focus more on recession or inflation? That’s the question we hope to get more light on from today’s NFP release. Even though there were indications that employment trends in the US were weakening the US economy added 372K payrolls in June. The number exceeded analyst expectations (268K) by a wide margin. Now the consensus expectation is again a bit more conservative (250K) than the payrolls average over the last four months (380K). 

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While both the expectation for this month’s NFP release and the four-month average is much lower than the record numbers in August 2021 – February 2021 (average 581) and point to a cooling jobs market both numbers are still relatively strong by historical standards.  Another stronger-than-expected number would help the Fed hawks as they look to continue aggressive rate hikes. 

The markets though aren’t convinced of Fed’s willingness to continue its aggressive inflation fight. Perhaps the recent employment-related data explains why this is the case. The trend in initial jobless claims has been negative (rising) and the job openings for June continued a negative trend too. The number of job openings for June decreased by 605K to 10.698 million from the May reading of 10.7 million. The drop brought this employment gauge to the lowest level in nine months. 

Currently, the Fed funds futures are pricing in a 62.5% probability of the Fed hiking by 50 bp in September and only a 48.2% probability for another 50 bp in November. This explains the recent rally in T-bonds (lowering yields) and the sluggish performance of the USD Index. 

If the markets are taking their cues from the above employment data trends and pricing in a less hawkish Fed (a higher probability of recession) then a stronger than expected NFP number would probably create repositioning in the markets. This often translates to higher volatility thus creating trading opportunities for day traders. 

As usual, trade the market reaction (price action) and not the news itself. Don’t try to force your opinion or expectations on the market, instead just wait and see what the market does. Then you are in the driver’s seat and can use the volatility created by others to gain some pips.

Trade Safe!

Janne Muta
Chief Market Analyst

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