U.S. NFP Preview: Stocks and Bonds at Risk as Fed Rate Cut Bets Deflate

If middling U.S. employment data argues against aggressive interest rate cuts, stocks and bonds may keep falling, gold will struggle and the dollar may mount a comeback

• Stocks and bonds have suffered so far in 2024 as markets question Fed rate cut bets.
• The U.S. employment report is now in focus, with broadly on-trend results expected.
• Middling results might cool stimulus speculation further, feeding the risk-off mood.

Financial markets returned from the New Year holiday in a defensive mood. The bellwether S&P 500 stock index is on track for its first weekly decline since late October, threatening to end a blistering nine-week winning streak. Against this backdrop, Treasury bonds are down as yields march higher across maturities.

Price action tells a similar story in currencies and commodities. The U.S. dollar is rebounding, with an average of the currency’s value against its top counterparts up over 0.8% so far this week as it tries to break a three-week run of losses. Gold is a mirror image of the greenback, trading on pace to snap three weeks of gains with a loss of nearly 1%.

A unifying theme seems to have emerged from the very first trading day of 2024: The markets seem determined to unwind some of the heady moves playing out in November and December amid a euphoric upwell of risk appetite across the asset spectrum. Traders were celebrating as the Federal Reserve appeared to endorse building interest rate cut bets.

All eyes on the U.S. jobs report

The spotlight now turns to December’s much-anticipated U.S. employment report. It is expected to show an increase of 175,000 in nonfarm jobsd while the unemployment rate edges up modestly to 3.8%. Average hourly earnings are rising 3.9% year-on-year, amounting to the slowest wage inflation since June 2021.

On balance, these would be middling outcomes. The pace of monthly payroll growth would land comfortably within the 105,000 to 262,000 range in place since mid-2023. The jobless rate would look similarly staid within the 3.4% to 4.0% range containing outcomes since January 2022. Even wage growth would be only slightly below the three-month average of 4.1%.

Analytics from Citigroup suggest U.S. economic data outcomes have increasingly converged on consensus forecasts since mid-August as market watchers upgraded growth expectations for 2024. That seems to imply that analysts’ models are relatively well-tuned to economic reality, making sharp deviations from the baseline seem less likely.

This raises a familiar question: if the “slow and steady” vision of the U.S. business cycle remains undisturbed, does it seem plausible the Federal Reserve must issue a blistering interest rate cut cycle in the months ahead?

Fed interest rate cut expectations: too far, too fast?

As it stands, the first of five 25-basis-point (bps) rate cuts is priced in to appear no later than May. The probability of a sixth reduction is now penciled in at 55%. This is a climbdown from where speculation peaked in late December, when all six cuts were fully baked into the markets and the likelihood of a seventh stood at 41%.

Faced with employment data arguing against a rapid business cycle swing one way or the other, the markets might reason that a further adjustment to a less hyperactive Fed makes sense. That threatens further follow-through on the week’s risk-off repositioning, hurting stocks and bonds in tandem while gold sinks and the U.S. dollar claws back territory.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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