Financial markets have long viewed the US central bank as behind the curve, anticipating that faster monetary tightening would be required to fight inflation. While rate hike expectations are now broadly in line with the rhetoric of FOMC members, investors long accustomed to easy money, are still secretly hoping that monetary policy will be less restrictive than expected. Thus, the markets have begun to watch for bad news on the American economy as so many good reasons to limit the enthusiasm for monetary tightening by the Fed.
While activity indicators in services have already started to slow, though still remaining in expansion territory, activity remains buoyant. The manufacturing ISM, for example, surprised on the upside in May, which weighed on long rates. Moreover, it is the labor market that occupies the attention of investors, with still strong imbalances between supply and demand, which maintains inflationary pressures, particularly on wages. The employment report for May was therefore closely scrutinized last week, as it could have an impact on the monetary trajectory for the end of the year. If the ADP report, published a few days earlier largely below expectations, could suggest a lackluster employment report, in the end it was not. Job creations over the month thus came out above expectations in May despite the headwinds on the American economy. The total number of jobs is thus only 0.5% of its pre-covid level, with however still strong disparities depending on the sectors, and the unemployment rate is still almost at its lowest level at 3.6%. The Fed therefore still has free rein to continue its restrictive monetary policy in the face of the solidity of the American economy and the declarations of FOMC members last week were rather hawkish, a sign that the slowdown in the pace of rate hikes in September is not yet fully acquired. Among the signals militating for an easing of the tensions on the labor market, one observes the continuation of the recovery of the rate of participation, with a notable acceleration of that concerning women. On wages, the peak of tensions also seems to have passed, with a monthly increase below expectations and a decline year-on-year (5.2% against 5.5% the previous month).
IIn Europe, the pressure on the ECB is growing after the new upward surprise on the inflation figures (8.1% in May for the euro zone against 7.8% expected and 7.5% in April). The zone, out of step with the United States, has not yet reached the peak of inflation and is, moreover more impacted by the energy crisis. The ECB meeting will therefore be one to watch closely this week, especially since interest rates, both short and long term, have risen sharply and tensions in peripheral countries are not far from resurfacing.
