Pressure mounts on central banks

Jobs report adds to inflation fears

Stock markets are back in the red on the final day of the week as investors continue to fret about the prospect of higher interest rates this year.

Whether this is just an exhaustion of the omicron relief trade, a case of January blues that will quickly be forgotten once earnings season gets underway next week, or something more significant will only become clear later this month.

But the data isn’t offering investors much chance for relief and the jobs report is just another example of that. The headline NFP miss was never going to generate too much relief as signs of tightness elsewhere is always going to take priority. That said, investors may feel they’ve dodged a bullet as the million new jobs that some predicted could have further convinced policymakers that the US is close to, or at, full employment.  

But the average earnings numbers, higher participation, and drop in the unemployment rate will surely overshadow the NFP number as far as the central bank is concerned. Higher participation is encouraging, as the slow recovery on this front is a major contributor to the tight labour market. But wages rising faster than expected will add to the prolonged inflationary pressures which will concern the Fed.

Will ECB fall in line with peers?

Inflation in the eurozone unexpectedly hit another record high in December, intensifying pressure on the ECB to follow in the footsteps of many of its peers and tighten monetary policy. The central bank is now among a minority that view inflation as transitory and while it may be proven correct, the data doesn’t make for easy reading.

Other central banks have abandoned the transitory line recently and this will only increase calls for the ECB to do the same. Policymakers appear to firmly believe that inflation will fall without rate hikes over the course of this year. The question now becomes whether they will be afforded the time to be proven right or align with others and the markets.

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