Key Economic News: Japan and US Labour, ECB Forecasts & More
Key data from some of the world’s leading economies was unveiled this week, providing traders, analysts, and consumers with much-needed information diving deeper into the new month.
From the US to Japan and the Eurozone, here are this week’s main economic updates:
US Labour Market: How Is the World’s Biggest Economy Performing?
It appears that the labour market of the world's largest economy is currently facing significant challenges, as reported on Wednesday, 3 July. Key concerns include high unemployment rates alongside stagnant wage growth.
Let’s take a closer look at the data:
High Unemployment
According to the Initial Jobless Claims report released on Wednesday, 3 July, there has been an increase in the number of Americans filing for unemployment benefits for the week ending on June 29th. The report indicated a rise of 4,000 claims to 238,000 on a seasonally adjusted basis, attributed to a combination of increased layoffs and higher interest rates impacting demand and consequently affecting businesses and their workforce.
Stagnant Wage Growth
Data released from the Automatic Data Processing (ADP) shows that American workers’ wages have dropped during the post-COVID era for both employees working at the same job and those seeking new employment. The formers’ wages “increased at the slowest rate in nearly three years in June,” while the latter’s “annual wage increases slid for a third straight month.”
What Do the Experts Think?
Due to the fact that US unemployment hit its highest level in over two years and weekly reports show a rise in unemployment benefit claims, experts, perhaps unsurprisingly, seem to be worried about the health of the labour market and its future.
According to economist Nancy Vanden Houten, “the rise in claims reflects more workers applying for benefits because they are finding it more difficult to find jobs as the pace of hiring has slowed” and that “initial jobless claims remain below the level [they] think would signal a significant slowdown in job growth.”
What Does This Mean for the Fed?
The Fed’s hawkishness is no news to market participants, and given this central bank’s prowess, many may want to keep tabs on its decisions to see how it might affect the economy, in general, and the labour market, in particular. Interestingly, this Tuesday, Fed Chair, Jerome Powell, revealed that the US economy is “back on a disinflationary path.” However, he also highlighted the fact that in order to cut interest rates, more positive data is needed.
According to Vanden Houten, the “current labour market conditions allows the Federal Reserve to be patient before lowering interest rates, although recent favourable inflation data provide them latitude to respond to any unexpected weakening in the labour market.”
Whether or not the Fed will adhere to the expectations might be revealed in the upcoming monetary policy meeting on 30-31 July.
How Did the Markets React?
Despite the weak jobs data, major Wall Street indices continued to rally on Wednesday, 3 July as many eyed the possibility of rate cuts. The S&P 500 and the Nasdaq (US-TECH 100) respectively gained 0.5% and 0.9%.
On the flip side, the Dow Jones Industrial Average (USA 30) slipped by 0.1% and the US dollar hit a 3-week low.
Japan’s Labour Market Forecast: Will the Economic Challenges Persist?
Japan, once the world’s third-largest economy, has recently been dethroned by Germany and appears to be facing increased economic uncertainty.
Data released on Thursday, 4 July, indicates that the country may experience a significant shortage of foreign workers by the year 2040. This shortage, estimated to be nearly one million workers, has the potential to harm Japan’s economy and impede its growth.
Current projections suggest that if the labour market trends persist, Japan will have 5.91 million foreign workers by 2040, resulting in a shortage of one million workers crucial for maintaining the country’s average annual growth rate of 1.24%. This issue is particularly critical considering Japan’s broader labour market challenges stemming from an ageing population and low birth rates.
Additionally, factors such as a weakened Japanese yen, scrutiny over human rights, and complexities regarding the acceptance of immigrant labour further complicate the country’s ability to achieve its economic and financial objectives.
Nonetheless, the actual future trajectory of Japan’s economy and its potential for recovery remain uncertain.
The ECB’s Warning: A Gloomy Outlook for the EZ’s Economy?
During their meeting in Portugal, European Central Bank (ECB) members expressed concerns about the Eurozone's economic trajectory, highlighting risks from trade tensions and increasing government debt. They also discussed the potential implications of France's elections, where Marine Le Pen's far-right party won the first round ahead of the second round next Sunday.
According to ECB members, the actual implications are still unclear, and it may be premature to intervene should France experience a debt crisis similar to the one caused by former UK Prime Minister Liz Truss's tax cuts in 2022.
Additionally, many investors believe these elections could trigger a bond market sell-off, potentially necessitating ECB intervention. ECB members also addressed the escalating US-China tensions, noting that the US embargo on Chinese EVs and semiconductors, along with the EU's less stringent bans on Chinese imports, could worsen if Donald Trump wins the US elections in November. Goldman Sachs analysts predict that if tensions escalate, the Eurozone's economy could be “disproportionately affected.
It will be interesting to keep track of the elections and how the markets would react in order to get a clearer picture of what might happen in the future. (Source: Financial Times)
Conclusion
Despite the short trading week (in observance of the 4th of July celebrations), a plethora of key financial and economic news emerged this week.
The data not only provided economists and consumers with valuable insights about the possible trajectory of some of the world’s leading economies, but may also be used to help traders assess their strategies going forward.
Keeping tabs on any key economic releases and news can also be helpful in order to understand the overall and the financial markets.
