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How Could Friday’s US NFP Data Impact Crypto?

By:
Joel Frank
Published: Jul 7, 2022, 17:48 UTC

A drop in wage-price pressure could help dissuade the Fed from a 75 bps hike this month, helping crypto.

Bitcoin

Key Points

  • Crypto markets are in an upbeat mood on Thursday ahead of key US jobs data on Friday.
  • The data could help determine whether the Fed hikes rates by 50 or 75 bps later this month.
  • But Friday’s report is overshadowed by next week’s US CPI report, with inflation very much the Fed’s main focus.

Cryptocurrency markets are in an upbeat mood on Thursday, with most major coins extending to fresh highs for the week. Bitcoin was last trading just above $21,000 and up around 4.0% in the last 24 hours. Ethereum was last trading close to $1,230 and up closer to 7.5% in the last 24 hours.

Upside in US equity markets is helping lift sentiment amongst crypto investors, but no big breakouts are likely ahead of Friday’s US labor market report for June. This is traditionally seen by investors as one of the most important US economic releases of the month given it is closely monitored by the US Federal Reserve. Traders typically like to refrain from placing big market bets ahead of big macro events that could trigger two-way volatility.

What Markets Expect?

According to a poll conducted by Reuters, the median expectation is for non-farm payrolls (NFP) in the US to have risen by just under 300,000 in June. That would mark a slight slowdown in the pace of job gains after NFP rose by closer to 400,000 in May.

The unemployment rate is seen remaining unchanged at 3.6%, roughly in line with pre-pandemic levels. The participation rate is expected to remain about 1.0% below pre-pandemic levels.

Growth in Average Hourly Earnings is seen easing slightly to 5.0% YoY in June versus 5.2% last month. That leaves it still well above the Fed’s 2.0% inflation target.

How Might Crypto React?

A key focus of the market right now is 1) how quickly the Fed will raise interest rates at its next few meetings and 2) how high it will eventually take rates in 2023. The Fed’s main focus at the moment is on inflation, with the central bank having all but admitted that it is willing to let growth and the labor market suffer if that is what’s needed to get inflation back under control.

Given this backdrop, this month’s US Consumer Price Inflation and PCE inflation reports are the most important US data releases. But that doesn’t mean Friday’s jobs report won’t move markets.

The current narrative around the US labor market is that it is very strong. The unemployment rate has been at pre-pandemic levels for some time. Job gains in recent months have been robust. JOLTs Job-Opening earlier this week showed that the demand for labor (as of the end of May) remained at historically elevated levels, with far more job openings than unemployed persons in the US.

Indeed, the main factor holding the US labor market back in recent quarters has been a lack of workers, with many having left the workforce since the pandemic (hence the lower participation rate). Lack of demand for workers has not been a problem.

The strength of the US labor market has given the Fed confidence that the US economy can “handle” a sharp rise in interest rates over the next few quarters. Meanwhile, wage growth well in excess of the central bank’s 2.0% inflation target has contributed to its fears that elevated inflation might become embedded.

If Friday’s jobs data comes out in line with expectations, or relatively close to expectations, these narratives remain unchanged. The market reaction, including in crypto, would likely be fairly muted.

If, for example, wage growth unexpectedly accelerated in June, and other labor market metrics came in stronger than expected, this would strengthen the case for a larger 75 bps rate hike later this month. Markets would probably also move to price in a slightly higher so-called “terminal” rate from the Fed in 2023.

This is hawkish and would likely weigh on stocks and crypto.

Alternatively, say wage growth slows more than expected and other labor market metrics are significantly weaker than expected. Say the headline jobs number unexpectedly comes in negative.

This would argue for the Fed to go with a smaller 50 bps rate hike later this month and would likely see markets lower Fed tightening bets for 2023.

This is dovish and would likely boost stocks and crypto.

Next Week’s US CPI Crucial

As noted above, the most important US economic data out this month will be US inflation prints. Next week’s June US Consumer Price Inflation report will be scrutinized by investors for any signs that inflationary pressures in the US may have peaked after PCE data for May suggested as much.

The proximity of next week’s CPI, which will be key in the Fed’s thinking at its policy meeting later this month, means that investors probably won’t want to draw too many conclusions from Friday’s jobs data. If it does show an as hoped for dip in inflationary pressures, crypto bulls are likely to rejoice.

About the Author

Joel Frank is an economics graduate from the University of Birmingham and has worked as a full-time financial market analyst since 2018. Joel specialises in the coverage of FX, equity, bond, commodity and crypto markets from both a fundamental and technical perspective.

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