US payrolls in focus

It appears a persistent inflation wave has been sweeping across south Asia after reaching multi-decade highs in Europe and the US. As a result, the Reserve Bank of India carried out a continuation of its tightening approach early on Friday, raising interest rates for the third time this year. However, much attention will be paid to the closely watched employment report for the US in July, which will be released later in the session. Investors look for clues as to how the Federal Reserve will assess the strength of the world's largest economy.

RBI continued the rate hike theme

The Reserve Bank of India raised interest rates by 50 basis points to 5.4% from 4.9%, which was higher than expected compared to 35 basis points expectations. Due to the current uptrend in inflation, the bank governor said it would continue to raise rates until inflation reached its target range, adding that it would do "whatever it takes" to avoid a hard landing following the COVID-19 pandemic policy era.

EU stocks rise on solid earnings

This week, European equities have registered gains and are expected to open in a mixed fashion on Friday. Due to the region's optimistic outlook for corporate earnings, concerns that the region is headed for an economic slowdown in the later stages of this year have mostly been swept under the rug. However, the upcoming US payroll data will likely prompt a degree of caution regarding the economy's outlook.

A surprising statement from the BoE

In a week where economic data from main regions indicate a slowdown in the global economy, the Bank of England warned Thursday of a long-term recession, starting in the fourth quarter of this year, as it raised interest rates 50 basis points to combat rising inflation.

In its statement, the Bank of England said that it expects inflation to peak at 13.3% in October, up from its June forecasts of 11%, and to be averaged at 13.1% during Q4, as well as predicting that inflation will remain high through all of 2023.

Therefore, it seems reasonable that we can expect to see a potential 50bps rate hike next month in addition to other rate hikes before the end of the year, given that the US Federal Reserve has already indicated it will move by at least a similar amount at its September meeting.

Moreover, the bank also downgraded its economic forecasts for this year, next year, and 2024. This essentially indicates that we will likely face a long and painful recession throughout 2023 and the most severe slump on record since 2008. On the basis of projections, the UK economy is expected to contract by 1.25 per cent in 2023 and 0.25 per cent in 2024, with unemployment set to increase to 6.3% by 2025.

Events of today

Investors will monitor July's nonfarm payrolls on Friday, which are expected to have increased by 250,000 jobs, down from 372,000 in June. It would be the 19th consecutive month of payrolls growing, but it would also be the smallest increase in that timeframe.

Wages are expected to remain steady at or around 5%, and the unemployment and participation rate to remain steady at 3.6% and 62.2%.

According to data released on Thursday, the number of Americans filing new unemployment claims increased dramatically compared to the week before. This suggests a slight softening in the labour market, which economists will examine to see if this trend is confirmed by the jobs report.

Cooling the job market could alleviate the pressure on the Fed to deliver a third straight rate increase of 75 basis points at its next meeting in September. However, in recent weeks, a number of high-profile Fed officials have taken a hawkish tone, implying that further interest rate hikes are imminent and the Fed is still firmly focused on taming inflation.