The imminent NFP report poses a potential quandary for both Fed and market participants. On one hand, steady job growth aligns with Fed’s intention to engineer a soft landing for the US economy. On the other, elevated wages growth due to tight labor market could compel Fed to maintain its tightening course, potentially complicating the soft landing strategy.
Expectations are set for a 200k job increase in July, while unemployment rate is predicted to hold steady at 3.6%. Average hourly earnings are projected to climb 0.3% month-on-month.
Based on recent developments, economists are gradually warming to the idea that Fed might achieve its “soft-landing” scenario for the economy. Consistent job growth around the 200,000 region per month would provide further support for this possibility.
However, uncertainties loom regarding wage growth. With an expected 0.3% mom growth, the annual rate could comfortably remain above 4% yoy – a figure significantly higher than the levels consistent with Fed’s 2% inflation target. A strong report will certainly spark debates in the market about whether Fed will need to tighten its monetary policy further toward a peak of 6%, up from the current 5.25-5.50%.
Relevant employment data presents a mixed bag. ISM Services Employment index was at 50.7 in July, down -2.4 points from 53.1 in June. Meanwhile, ISM Manufacturing Employment was lower at 44.4, marking a decline of -3.7 points from 48.1 in June. In contrast, ADP reported private payrolls at 324k against forecast of 195k and prior month’s stronger 455k.
Japan’s PMI services reaches record high in April, record optimism too
Japan PMI Services rose to 55.4 in April, up from 55.0 in March, marking the eighth consecutive month in growth territory. This represents the highest reading since records began in 2007, surpassing the previous record set in 2013. S&P Global also noted that year-ahead business expectations reached an all-time high, while prices charged increased at the steepest pace in nine years. Meanwhile, the PMI Composite remained unchanged at 52.9, as stronger services growth offset a sharper reduction in manufacturing production.
Tim Moore, Economics Director at S&P Global Market Intelligence attributed the record rise in service sector output to a rebound in demand for face-to-face consumer services, recovery in international tourist arrivals, and improvement in new business from abroad.
Moore also emphasized the high level of business confidence, with around four times as many service providers expecting an increase in activity as those forecasting a decline. This optimism marked the highest level in more than 15 years of data collection.
Furthermore, service providers increasingly passed on higher business expenses to customers to alleviate pressure on margins from rising wages and transportation costs. This resulted in the steepest increase in service sector output charges since the sales tax hike in April 2014.
Full Japan PMI services release here.