Strong U.S. Economic Data and Hawkish Fed Commentary Threaten the Stock Market
By:Ilya Spivak
Wall Street woke up with a start from its holiday slumber over Easter weekend, startled by news unveiled while exchanges closed for Good Friday (as expected).
The personal consumption expenditure (PCE) measure of U.S. inflation registered squarely in line with expectations at 2.5% year-on-year for the headline reading and 2.8% for the core measure excluding food and energy. A speech from Federal Reserve Chair Jerome Powell was spicier than traders might have liked, however.
The central bank chief pushed back on rate cut speculation, saying that the impressively resilient economic performance in the U.S. affords officials the chance to be a little more confident on the path of inflation before reducing borrowing costs. “We don’t need to be in a hurry,” he said.
Another bit of better-than-expected economic data helped to reinforce the message. A survey of manufacturing performance from the Institute of Supply Management (ISM) showed that sector unexpectedly returned to growth last month for the first time since October 2022.
In response, Fed Funds futures moved to price in 57 basis points (bps) in rate cuts in 2024. This means the markets now price in two 25bps reductions and a mere 28% probability of a third. That puts investors on the hawkish side of policy officials, who penciled in three cuts into official forecasts just two weeks ago.
The prospect of more expensive credit than the official baseline spooked risk appetite. Stocks fell, with the bellwether S&P 500 down 0.25%. Treasury bonds shifted to reflect higher rates across the yield curve. The benchmark 10-year rate jumped 10.7bps to a two-week high. The U.S. dollar added 0.5% against an average of its major peers.
Here are the macro waypoints likely to shape price action in the week ahead.
Eurozone inflation is expected to have held steady at 2.6% year-on-year in March, unchanged from the prior month. The core rate excluding volatile food and energy prices is marked for a decline, however, down to a two-year low of 3%.
Baseline forecasts for German numbers due to cross the wires a day ahead of the region-wide report are likewise tilted to the downside. CPI harmonized to the use the same methodology as the European Central Bank (ECB) – a more policy-relevant measure than domestic calculations – is expected to slip to 2.4%, the lowest since November 2023.
Analytics from Citigroup reveal economic data outcomes from the single-currency bloc have soured somewhat relative to forecasts over recent weeks. If that sets the stage for downside surprises on incoming CPI releases, the growing likelihood of an ECB rate cut as soon as this month is likely to punish the euro.
The head of the U.S. central bank is due to discus the outlook for the economy at the Stanford Business, Government and Society Forum this week. His remarks will come alongside the March service-sector ISM survey as well as an estimate of private sector jobs growth from HR management giant Automatic Data Processing (ADP).
The headline ISM print is seen coming in at 52.6, putting the pace of services activity growth in line with February’s result as well as the 12-month average. Meanwhile, a rise of 148,000 in private payrolls would mark a three-month high.
Stock markets may wobble if Powell continues to play down scope for near term stimulus while the data outcomes extend the recent run of better-than-expected U.S. economic news. The U.S. dollar may likewise extend its broad-based recovery against the major currencies.
The March edition of the much-anticipated official set of U.S. labor market figures is expected to deliver an increase of 200,000 in nonfarm payrolls—a narrow climb down from February’s 275,000while the jobless rate holds steady at 3.9%. Average hourly earnings are seen growing 4.1% year-on-year, the lowest since June 2021.
The latter number may be the most market-moving in the data set. Ensuring that wage inflation continues to be squeezed lower is essential to the Fed’s fight to bring price growth back to the target 2%. If stronger-than-expected economic outcomes continue to echo in unexpectedly sticky price pressure, the likely rate cut tally will diminish further.
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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