The strong US labor market increased fears of further interest rate hikes by the Fed

US employers announced 40,709 layoffs in June, down 49% from the 80,089 layoffs announced in May. Private sector jobs rose to 497,000 in June, much higher than the gain of 267,000 in May and much better than the estimated 220,000. At this point, the labor market is showing no signs of easing, giving the US Fed room to tighten further. Today in the US, the Nonfarm report will be released. Economists forecast that the US economy will add 200,000 jobs in June. The unemployment rate is expected to be 3.6% (now 3.7%), and average hourly earnings will be 0.3%.

Federal Reserve Bank of Dallas President Lorie Logan said yesterday that further interest rate hikes would likely be needed to stimulate meaningful disinflation and return the rate of price growth to the Central Bank’s target level. She added that forecasts from Fed officials showed two more interest rate hikes this year.

Head of the German National Bank Nagel said yesterday that, at present, the ECB does not see a threat of excessive policy tightening but does not know yet where interest rates will peak. Nagel also added that rates will remain restrained for an extended period.

Traders are betting on a Bank of England interest rate hike to 6.5% by March 2023. Raising the cost of borrowing to that level would put mortgages further in the Bank of England’s pain zone, making credit less available to businesses and dealing a sharp blow to the economy. It will also exacerbate the difficulties facing the government of Prime Minister Rishi Sunak in the run-up to next year’s elections.

Oil continues to fall in price amid fears of a rate hike. But amid signs of tightening supply and improving demand, oil still has a good chance of going higher. Data on Thursday showed US inventories declined more than expected, with a larger-than-expected drop in gasoline inventories pointing to improved demand for fuel during summer.

Asian markets were mostly down yesterday. Japan’s Nikkei 225 (JP225) fell by 0.86%, China’s FTSE China A50 (CHA50) was down by 0.82%, Hong Kong’s Hang Seng (HK50) lost 2.44% for the day, and Australia’s S&P/ASX 200 (AU200) closed negative by 1.25%.

In Japan, the wage hikes triggered by this spring’s labor negotiations have begun to take effect. Base wages rose by 1.8% in May compared to last year’s period, the most significant increase since February 1995. Wage growth is one of the key trends under scrutiny by the Bank of Japan (BOJ) as the Central Bank considers whether and when it should roll back its super-soft monetary stimulus. BOJ Governor Kazuo Ueda has repeatedly stressed the need for an accommodative policy until wages rise enough to support sustained price growth of around 2%.

New Zealand’s Central Bank is likely to keep interest rates unchanged at 5.50% next Wednesday and leave that level for the rest of the year, marking the end of its 20-month cycle of increases that have already driven the economy into recession. The country’s biggest banks – ANZ, ASB, Bank of New Zealand, Kiwibank, and Westpac – are not forecasting any rate changes next week.