June payrolls signal 75bps rate hike...

As markets were discounting a 50bps interest rate hike, two senior Fed officials publicly stated their disagreement—arguing for a 75bps hike instead. Investors where on the fence, with today’s non-farm payrolls unquestionably at the epicenter of attention.

Expectations, and hopes, of non-farm payrolls at 268k suggested a sharp slowdown in growth. Economists largely forecasted a deceleration in growth as the impact of rate hikes was expected to negatively impact most growth metrics.

The White House was also vocal, according to Politico, President Biden was keen on a proactive approach. The President found himself in a very precarious position, which required a major shift in rhetoric; from advertising a strong labor market, to now arguing why a slowdown would be a good thing!

Admittedly, the change in rhetoric was correct; slower job and wage growth is expected to help cool-off inflationary pressures, ultimately leading to a more tempered 50bps rate hike from the Federal Reserve.

Unfortunately, expectations were not met as payrolls grew by 372k (~38% above expectations), leading the unemployment rate to settle at ~3.6%, near its pre-pandemic level.

What are the implications moving forward?

?Following June’s strong payroll data, the Fed is expected to proceed with another large 75bps rate hike. It’s no coincidence that non-farm payrolls were on investors spotlight.

State Street strategist Marija Veitmane clearly presented the Fed’s predicament after strong payroll data, stating that:

?“A strong number means the central bank needs to be more hawkish”, adding that “You need to see a slowdown in the labour market in order to see inflation coming down.”

In conclusion, the odds-on scenario is revised to a more hawkish 75bps hike. This will likely drive a further sell-off in US markets, and if history is any guide, low cash flow yielding business are expected to suffer most.?

Sources: Financial Times, Politico