US payrolls will provide a steer on the rate outlook

OVERNIGHT

Asia-Pacific equity markets are mostly up this morning despite declines in European and US markets yesterday. The announcement by the Chinese central bank that it would step up its stimulatory measures may have provided support. Meanwhile in Australia, comments in the latest Statement on Monetary Policy seemed to support the view that interest rates have peaked. German factory orders rose by 7.0% in June and are now 3.0% higher than a year ago.

THE DAY AHEAD

With yesterday’s Bank of England policy update now out of the way, the market focus seems likely to shift to international developments and in particular the outlook for the US economy. At last week’s press conference following the Federal Reserve’s decision to raise US interest rates again, Fed Chair Powell emphasised that any further moves would be very dependent upon upcoming economic data. That next rate decision is due on 20th September and in the meantime a lot of data is set to be released. The most important of these will probably be the two CPI inflation reports (starting with one next week) and the two labour market reports including the one today. 

The labour market report is always seen as a key bellwether of US conditions, but Powell’s remarks mean that today’s report and the next one in early September will receive even more attention than usual. The focus will be on what employment growth and the unemployment rate say about the tightness of the labour market and the pace of wage growth. We forecast another sizeable rise in employment of 230k in July along with an unchanged unemployment rate from June at 3.6%. However, annual wage growth may again slow modestly to 4.3% from 4.4%. Such a combination of outturns would still leave it unclear whether domestic inflation pressures are easing sufficiently to reassure Fed policymakers that they can hold off from further tightening.

In the UK, BoE Chief Economist Pill will follow up on yesterday’s interest rate hike with a briefing to the central bank’s regional agents. As they have to go out and explain the decision they will probably be looking for further detail on the BoE sees inflationary pressures developing from here and any hints on what is likely to happen next to monetary policy.   

The July UK PMI construction index will provide a timely indication of activity in a very interest rate sensitive sector. In June, the overall index fell below the 50 expansion level for the first time since January as a further slump in housing more than offset rises in commercial activity and civil engineering.  

MARKETS

Longer-dated Treasury yields rose sharply in the US yesterday. Bond yields also rose, albeit more modestly, in the UK and the Eurozone. In currency markets, sterling declined against both the euro and the US dollar after yesterday’s BoE policy announcement, but it has partially rebounded overnight.