Federal Reserve and NFP – A Busy Week Ahead for Traders

From highly-anticipated big tech and pharmaceutical earnings to major monetary policy meetings, CPI’s and other economic data to watch out for, there’s plenty to keep everyone busy.

According to the broker ActivTrades, the attention of investors in US markets and Forex traders will undoubtedly be drawn to the Federal Reserve’s Monetary Policy Meeting with its resulting interest rate decision, and they will also keep a careful eye on results from the employment data from the US Nonfarm payrolls to follow later in the week.

FOMC Expectations

After its upcoming two-day meeting on the 31st of January to 1st of February comes to a close, the statement and interest rate decision from the FOMC will be released at 19:00 GMT on Wednesday the 1st of February. With a rate increase expected of 25 basis points at this meeting, the Federal Reserve is widely anticipated to continue decreasing the speed at which they are raising rates and it is hoped there may even be cuts later this year.

According to the FOMC minutes from the December policy meeting, all Federal Reserve officials agreed at the time that the bank should reduce the aggressiveness of its interest rate increases to come. This would allow the Fed to continue raising interest rates to combat inflation, but in a more gradual manner that would reduce the potential risks to economic growth.

The minutes also revealed that policymakers were concerned about a perception that financial markets would question whether their commitment to fighting inflation was waning and that they were still working to slow price increases that were running hotter than expected.

Recent evidence shows that the prospects of a ‘soft landing’ for the US economy may have increased, and the Fed would likely be right to back off of its unusually large interest rate rises from last year. Similarly, price rises are slowing down: CPI dropped to 6.5% in December, marking the sixth straight monthly decline.

The Federal Reserve has several valid reasons to maintain its hawkish stance for now though, with the job market as robust as it is, the unemployment rate having dropped to a post-pandemic low of 3.5 percent, and pay growth having remained healthy. Furthermore, policymakers seem to believe that the current strong job market will last for some time.

A deeper dive into the most recent data reveals that price hikes may be greater and more long-lasting than the market anticipates, even as inflation slows. The rate of inflation in the service sector remains high. Shelter inflation, which is a proxy for CPI’s main component, housing expenses, has now hit its highest yearly rate (7.5%).

There is little doubt that disinflationary tendencies are now present, but the Core PCE suggests that price pressures are on the horizon, and the labor market continues to defy expectations, which may drive the Fed to stay watchful in its battle against inflation.

US Nonfarm Payrolls Forecast

This week, key employment data is due in the form of the ADP National Employment Report (out on Wednesday, February 1st) and the official Nonfarm Payroll Report from the Bureau of Labor Statistics (out on Friday 3rd of February). The ADP Report- which is based on the payroll information of almost 400,000 U.S. company customers- measures the monthly change in non-farm, private employment. It’s due to come out two days before the official BLS report and is often used as a forecasting tool.

Even though there have been many stories of layoff announcements in the IT, banking, and real estate industries in recent months, it is still anticipated that the nonfarm payroll data should show employment growth of around 185K. The expectation is supposed that the majority of the layoffs will take place over the course of the next couple of quarters, so there is still a chance of seeing a job total that is better than anticipated.

The Federal Reserve has steadfastly been attempting to reduce economic growth with its rate increases over the last year to control inflation, which in turn should have impacted the employment figures for the downside. In the meantime though, and defying these expectations, the job market continues to be robust, as seen by the fact that even while payroll growth slowed in December, it was still stronger than predicted.

The growth in nonfarm payrolls for last month was 223,000, which was more than the projection from analyst estimates of 200,000. Additionally, the unemployment rate dropped to 3.5%, which was 0.2 percentage points lower than anticipated. The employment increase was somewhat lower than the original estimate of 256,000 jobs added in November, which was later revised down to reflect a loss of 7,000 further jobs.

A number of participants during the Fed’s December monetary policy meeting pointed to the fact that the labor market was showing indications of improvement, including a decrease in job vacancies and quits in the second half of 2022, and comments from District contacts that they were seeing more competent job applications for available jobs than earlier in the year.

They also highlighted that payroll employment may have overstated the strength of job growth in 2022, noting that other metrics of employment, such as the Bureau of Labor Statistics’ household survey and the Quarterly Census of Employment and Wages, pointed to a slightly different picture.

The Fed anticipates that over time, supply and demand in the labor market will come into better balance, which would ease upward pressures on nominal wages and prices, provided that monetary policy in the medium term followed a course that was appropriately restrictive.

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