What to Look for in the FOMC Minutes and NFP

Markets will have a shortened trading week to start the year after the worst yearly performance since the subprime crisis back in 2008. Economic data releases will pick up the pace next week. But, in the meantime, there are two major events on tap for the coming days: The release of the FOMC's minutes from the last meeting on Wednesday, January 4, and the Nonfarm Payroll (NFP) numbers released on Friday, January 6.

Why Follow the FOMC Minutes and NFP releases?

The FOMC minutes are a detailed record of what the interest rate policy-setting committee discussed when they met the last time, two weeks ago, on December 15, 2022. They provide detailed insights on the members' stance on monetary policy, including summaries on economic conditions and the rationale behind each member's decision. So traders look through the minutes carefully for clues for what could happen in the next rate-setting meetings of the Fed.

The NFP numbers will be released at the end of the week. As the name suggests, they represent the total change in the number of people employed during the prior month, excluding agricultural or other farming industry workers. Job creation is an important indicator because it is an indicator of consumer spending, which represents the majority of economic activity. Investors are highly focused on employment data, since strong wages could slow corporate profits and hurt earnings across the market. Generally, a higher-than-expected reading can be seen as positive for the dollar, but a lower reading can be seen as weakening the dollar. 

What to Focus on in the FOMC Minutes?

The Fed has raised rates at every single one of the last seven minutes, totalling 4.25 percentage points, making it the most hawkish since 1980. At the previous meeting in December, the FOMC hiked rates by 50 basis points. Since then, members of the rate-setting committee have been mostly silent, so there is renewed interest in potential insight from the minutes about whether policymakers are confident that inflation will come down over the next year. Inflation was last reported at 7.1%, with the slowing economy expected to bring it down to 3.2% by the end of the year. 

The US Dollar Index (DX) has found it challenging to gain from supporting economic data as of late due to increasing worries that the Fed will over-tighten and push the economy into a recession. In fact, the Fed's Chairman Jerome Powell has indicated that the committee will be switching to smaller rate hikes to assess the economic impact but ultimately lift interest rates higher in a "slower but higher" regime. 

What's Important in the NFP Figures

Despite the higher interest rates, the labour market in the United States has remained resilient, unlike other parts of the economy, such as housing, as mortgage rates have risen above 7%. There were several high-profile significant layoffs in the last few months, for example, Amazon (AMZN) and Meta (META), but the unemployment rate peaked at 3.7% from 3.5%. NFP has been over 250K a month since September. Between then and now, economists have repeatedly been forecasting NFP to come in within the 200K range and are forecasting 217K jobs created last December. The unemployment rate is also expected to stay steady at the historically low rate of 3.7%.

The tight labour market in recent months has remained an issue for the Fed. When substantially more jobs are available than people looking for work, wages can move higher and keep inflation up for longer. This has led to expectations that the Fed will focus on the labour markets instead. There are signs that the market is starting to loosen: the number of people quitting and getting hired has slowed while layoffs have increased. Also, continuing jobless claims have reached the highest level since February last year, and the number of new job offers added each month has started to slow down.

Conclusion

Following the December meeting of the FOMC, the median forecasts for the peak of interest rates moved up to 5.0-5.25% from 4.50-4.75% three months earlier. The FOMC is expected to meet at the end of this month and hike the rates once again. For now, the majority of economists are inclined towards a 25bps potential hike. The loosening of the job market is critical for the Federal Reserve and will be analysed in conjunction with the FOMC minutes being released this week.