All eyes will be on the employment data released by the US Bureau of Labour Statistics next Friday. In April, the US unemployment rate was unchanged at 3.6 per cent with nonfarm payroll employment increasing by 428,000.
These figures are largely unchanged from February 2020, just before the pandemic struck, but the issue for Federal Reserve chairman Jerome Powell is that the labour force participation rate is 1.2 percentage points lower. This is contributing to a very tight labour market with nearly two job openings for each unemployed person.
The FactSet consensus expectation is for 312,500 new jobs to have been added in May. If that is correct it will add increased pressure in an already tight labour market. However, a slowdown from last month may mean the rate of wage inflation could also be set to slow. It levelled off at around 6 per cent on an annual basis in April after a big jump at the turn of the year.
The EU also has a historically tight labour market and we will find out more when Eurostat releases its unemployment rate for April on Wednesday. In March, the seasonally-adjusted unemployment rate was a record low 6.8 per cent, down from 6.9 per cent in February. This is forecast to fall to 6.7 per cent in April.
Vacancies are the highest they have been for a decade. This is part of the reason why the ECB is now ready to start tightening economic conditions to tackle inflation. In a blog post on 23 May, central bank president Christine Lagarde wrote that due to the pandemic stimulus and the supply shocks caused by the war in Ukraine the “disinflationary dynamics of the past decade are unlikely to return”.
As a result, she thinks policy should “return to more normal settings rather than those aimed at raising inflation from very low levels”. However, weakening consumer confidence in Europe means Lagarde is skeptical about tightening too quickly at the risk of causing a recession.
The UK will get a better understanding of how interest rate rises are effecting its housing market when Nationwide releases its house price index on Tuesday. In April, annual growth was 12.1 per cent, down slightly from 14.3 per cent in March. The imbalance in supply and demand, coupled with remote working increasing the appetite for more space at home, has continued to lift prices over the past two years.
However, with the house price to income ratio at record highs, and interest rates now rising, it is likely the rate of house price growth will continue to slow as the year progresses. For now, April mortgage approval data, also released on Tuesday, is expected to show the number of approvals remained relatively elevated at around the 70,000 mark.
