Job data are a focus this week, and they could add steam to the reflation trade.
Although Jerome Powell assured that economic conditions are still far from optimal last week, the market is starting to price a sudden U-turn in monetary policies. Inflationary data are strengthening by the day. If jobs are recovering faster than expected, the Federal Reserve might need to tighten financial conditions earlier than expected. This Friday's nonfarm payrolls are expected to show that the US economy created 978,000, the most significant increase since last August. Unemployment is also expected to fall to 5.7% from 6% prior. Any surprise in these data may indicate a faster than expected economic rebound in the United States, pushing forward the central bank’s tapering agenda.
Ahead of Friday's nonfarm payroll, we will be watching ISM manufacturing and services reports coming out today and Wednesday. Also, the initial jobless claims on Thursday will be critical. Claims have dropped to 553k recently but remain well above healthy market condition, which is believed to be around 250k.
Suppose the Fed won’t start tightening the economy amid strong economic and inflationary data, therefore the risk of a policy mistake increases. So far, there are no elements to suggest that up ticking inflation will be temporary. Therefore, if the Federal Reserve's intervention comes too late, inflation might get out of control, and interest rates will need to rise exponentially.Today Powell will speak at a virtual event hosted by the National Community Reinvestment Coalition. We don't expect him to offer fresh insight into the economic recovery. However, it will be necessary to listen to his speech to understand whether there is any relaxation surrounding tapering considerations.