NFP on the horizon next week. What will the Fed decide?

The key economic event to watch this week is the release of the US employment report for May on Friday. Carefully watched non-farm employment data (NFP) provide insight into the strength of the domestic labor market, potentially offering clues as to the likelihood of another interest rate hike Fed in June. Earlier, on Thursday, we will know the flash inflation reading in the euro zone for May.

1. Non-Farm Employment in the US (May) - Friday

The resilience of the US economy continues to show in employment data. According to the US Bureau of Labor Statistics, the economy added 253 jobs in April, beating expectations of 000 non-farm jobs (NFP) and surpassing the downward revised March figure of 185.

Consensus breaking data is nothing new. Since early 2022, the NFP has exceeded forecasts every month except March 2022 as economists have consistently underestimated the strength of the labor market.

The latest employment report also showed that the unemployment rate fell to 3,4% in April, while average hourly earnings rose 4,4% year-on-year. Vacancy rates remained high, with more than 9,5 million open positions. However, that number is down more than 2 million from its peaks in March last year. The economic activity rate remained stable at 62,6%, the highest level since before the pandemic, and the number of new unemployed remained low.

ADP company The payroll processing company also paints a solid picture of the US labor market. Her latest report showed that private employers added 296 jobs in April.

The Bureau of Labor Statistics report for May is expected to show that 180 jobs have been added while the unemployment rate has risen to 000%.

2. Flash CPI for the euro area (May) - Thursday

The decline in energy prices in recent months has resulted in a sharp drop in headline inflation in Europe. After peaking at 10,6% in October, eurozone inflation measured consumer price index (CPI), fell to 6,9% in March. Then it rose to 7% in April.

Core inflation, which excludes energy, food, alcohol and tobacco prices, hit a record high of 5,7% in March before falling to 5,6% in April.

Persistently high inflation in the currency bloc is a problem for European Central Bank. His governing board is divided over how many more rate hikes might be needed to bring inflation under control. The central bank's comments have been very hawkish recently, and in June there was talk of raising interest rates by half a percentage point.

However, few economists believe that the ECB will continue to raise interest rates if the US Federal Reserve holds off on raising rates in June. The upcoming flash CPI reading for May could make life difficult for the ECB if it turns out that price growth has accelerated. This may increase the likelihood that interest rates will have to increase or stay at current levels for a longer period of time.

3. Manufacturing PMI (May)

Last week's latest preview PMIs showed that activity in the manufacturing sector in France and Germany remained weak, while in Germany activity deteriorated further to the lowest levels since June 2020, when economies were still feeling the effects of the pandemic.

We also learned that the German economy is in recession after Q0,3 GDP was revised down to -XNUMX%. On the other hand, the UK and the US recorded a slight increase in economic activity.

It is clear that manufacturing is in a difficult position around the world, and we see this in China as well, and in copper and iron ore prices, suggesting that global demand is weakening sharply. Economic activity in Italy and Spain is also expected to weaken further when their latest PMIs are released later this week.