Most of the stock markets in the world recovered after the first month of summer amid renewed hopes that mixed signals about the recovery in the US economic growth, as well as the Fed's persistent confidence, will remain unchanged. This week, investors began to be nervous again, fearing that the inflation growth would eventually force the regulator to change its mind.
The topic of the risk of an earlier increase in the US interest rates has been discussed in the market again. As mentioned above, the incoming economic data is ambiguous, and the recent increase in the Fed's inflation expectations makes investors nervous. This is due to the fact that the Central Bank can make a radical decision any time to change the course of monetary policy based on the economic situation.
It was previously mentioned that this week's main event will be the release of employment data in America. The ADP figures will be the first data to be released, namely on Wednesday. A more modest increase in the number of new jobs is expected here – to 600,000 in June, than 978,000 in May. But on the contrary, the official data from the Ministry of Labor suggest a larger increase, that is, to 690,000 in June against 559,000 in May. We will find out soon what will be the real values. For now, we are looking forward to the possible reaction of the market.
In our opinion, any employment figures will only have a limited impact on the markets. The positive values will push up the demand for stocks and other risky assets, while the negative ones will lead to disappointment and a decline in stock indices, but nothing more. We believe that the reason for such a limited reaction will be the uncertainty factor that currently dominates the markets about how the Federal Reserve will act in reality in the conditions of even stabilized, but high inflation. Fulfilling its mandate as a regulator, it will not be able to indefinitely ignore the high level of inflation, which will hurt the incomes of the population and eventually force them to make an unpopular decision – to start the process of normalizing monetary policy, which will begin with a reduction in the volume of government bond purchases, and end with an increase in interest rates. All this will happen amid a gradual curtailment of stimulus measures.
This scenario will certainly lead to the collapse of the "bubble" in the stock markets and the strengthening of the US dollar. The rising dollar will lead to an increase in the cost of American goods and services in the world, which will hurt the local economy. On this wave, it will be possible to observe a new wave of crisis phenomena in the United States, and it is difficult to guess how it will end.
Forecast of the day:
The USD/CAD pair is trading at the level of 1.2345. Its breakdown will allow the pair to further rise to 1.2400.
The USD/JPY pair is consolidating above the level of 110.50. A decline below it will let the pair decline to 110.15.