Will a poor jobs report dissuade the Fed from aggressive rate hikes?

U.S. hiring is expected to have slowed in January, with some economists warning the economy is shedding jobs as the fallout from the Omicron coronavirus wave becomes more widespread.

The US economy is expected to have added 175,000 jobs at the start of the year, up from 199,000 in December, the Labor Department said on Friday. The unemployment rate is expected to remain stable at 3.9%, according to Bloomberg estimates. The average hourly wage is expected to rise 5.2% from a year ago, compared to 4.7% in December.

However, economists continue to revise their estimates and some are warning that there is a risk of a contraction in the wage bill in January as the highly transmissible variant of Omicron hits leisure and hospitality, health care and other service-related industries.

Economists at Jefferies note a “high probability” of a negative impression, while those at Pantheon Macroeconomics predicted the United States would cut 300,000 jobs.

“The jobs report won’t do much to change the Federal Reserve’s bullish view of the labor market,” said Lydia Boussour, senior US economist at Oxford Economics.

The Fed is squarely focused on curbing runaway inflation, and Fed Chairman Jay Powell said this week, “I think there’s enough room to raise interest rates without threatening the market. work”.

“Fed officials see a very tight labor market and they are likely to look through the temporary weakness in job creation,” Boussour said. Mamta Badkar

Will the Bank of England start unwinding its bond buying programme?

The Bank of England is expected to raise interest rates for a second consecutive month at its meeting this week. This means investors are looking beyond a 0.5% increase in borrowing costs – which is widely priced in by the markets – to see if that triggers the start of the $875bn liquidation process. pounds of central bank government debt bought under its quantitative program. relaxation programs.

In August, when it presented its strategy for tightening monetary policy in the wake of the coronavirus pandemic, the BoE signaled that it would start reducing its balance sheet when rates hit half a percent. It would do so by not stopping the reinvestment of the proceeds of the bonds it holds as they mature, “as appropriate given economic circumstances”.

With inflation soaring dramatically since last summer, that moment seems poised to arrive sooner than expected by investors, or the BoE itself.

If BoE rate setters decide a rate hike is appropriate, they will likely deem starting to unwind QE to be appropriate as well, according to Nomura economist George Buckley.

“With Governor Bailey’s previously expressed desire to reduce the balance sheet, a move sooner rather than later seems reasonable,” Buckley said. This would mean the so-called ‘quantitative tightening’ would start in March, when a £28bn gilt held by the central bank would mature.

There is always a chance, however, that the BoE has “cold feet”, said Ruth Gregory of Capital Economics. According to Gregory, he could also tone down his previous forecast that he will “consider” actively selling bonds in his portfolio once rates hit 1%.

“It would look like an accommodating development,” she said. Tommy Stubbington

Will the ECB signal any monetary policy changes at its January meeting?

Many economists expect no policy change from the European Central Bank at its first policy meeting of 2022 on Thursday, despite the eurozone facing runaway inflation.

The time for a possible rate hike at the ECB “has not yet come,” said Carsten Brzeski, global head of macro at ING.

He pointed out that the Federal Reserve came close to its first rate hike in the pandemic era, but that the US economy had already grown well above what it produced when the health emergency struck.

By contrast, the euro zone economy is expected to have recovered to pre-pandemic levels in the fourth quarter, when data is released on Monday.

This week’s ECB meeting is unlikely to bring policy changes, Brzeski noted. “Instead, the central bank will have to master a new inflation communication challenge: avoiding any apparent shift from patience to panic,” Brzeski added.

George Buckley, Economist at Nomura, also does not expect any major shifts in policy or direction, and believes the ECB will be able to begin a slow normalization of key rates from June 2023. But” the risks are on the upside for our rate.” view,” Buckley warned.

Eurozone inflation rose to an annual rate of 5% in December, its highest since the euro’s inception and more than double the ECB’s 2% target. The ECB expects the peak of inflation to have passed during the fourth quarter.

Ellie Henderson, an economist at Investec, said Wednesday’s release of a flash estimate of January’s harmonized consumer price indices “will give a first hint” as to whether that forecast is “coming true”. Valentina Romei