The Federal Reserve may be set to put its rate hikes on hold, but the European Central Bank’s tightening phase is in full swing.
The ECB today raised its key interest rate by 25 basis points to 3.0%–the fourth rise in eight months. The Bank of England also elevated the price of money today, bumping up its key rate by a quarter of a point to 4.75%. The BoE’s decision was unexpected, and is the first rate hike for the bank in two years.
In both cases, the common denominators were economic growth and rising inflation. Although neither looks poised for a radical break out on the upside any time soon, the upward momentum of late is worrisome for the central bankers.
Back in America, the buzz (again) is that the Fed is set to pause in its two-year-old campaign to raise interest rates. Anticipating as much, bond traders chased the benchmark 10-year Treasury to the extent that its current yield fell to 4.96% by the close of yesterday’s session, the lowest since June 13.
The official word from the Fed on interest rates comes next Tuesday. Between now and then, precious little new data will be released, excepting for tomorrow’s update from the Labor Department on July’s employment status. Judging by the consensus outlook, as per, not much will change. June’s jobless rate of 4.6% is forecast to remain the same for July, while the widely monitored nonfarm payrolls number for last month is expected to rise only marginally.
But in the spirit of the times, there’s still reason to keep an open mind about what comes next. Case in point: yesterday’s July update of the controversial ADP National Employment gave traders an excuse to wonder if tomorrow’s government employment update for July will be weaker than expected, in which case the bond bulls will be beside themselves with celebration. The ADP report showed a sharp decline last month in the growth of private employment in the U.S. July added only 99,000 new jobs to the economy, according to ADP, down from 368,000 in June.
By ADP’s standard, the Fed will find more than enough statistical ammunition to call off the rate-tightening dogs next week. But there’s a debate about how accurate the ADP numbers are relative to the government’s survey of payroll trends. David Resler, chief economist at Nomura Securities in New York, advised in a note to clients today that in the brief three month history of the ADP employment report, “it has not proven to be a very reliable indicator of the change in nonfarm payrolls as estimated by the BLS, so I suspect few forecasters will change their estimate of nonfarm payrolls.”
Ed Yardeni, chief investment strategist for Oak Associates, also notes that ADP’s numbers may be suspect. In an email to clients this morning, Yardeni summarized some of the issues at stake in the dispute:

Yesterday’s ADP employment report, which is based on actual paychecks, showed an increase of only 99,000 in private sector jobs in July, following a gain of 368,000 in June. The official June headcount conducted by the Bureau of Labor Statistics showed nonfarm payrolls rose 121,000 and 90,000 with and without government employment. June’s household employment survey showed a very impressive gain of 387,000. The ADP series starts in December 2000 and has tracked the official numbers closely. That’s why [I’m] sticking with 180,000 to 200,000 for Friday’s payroll number, well above the consensus of 140,000. We figure the divergence with the ADP report should be narrowed, and that the economy is still creating plenty of jobs. In any event, the payroll numbers will most likely determine whether the Fed raises the federal funds rate one more time next week and then pauses, or pauses next week.

It’s all about the numbers now. May the statistical gods have mercy.