Cool down
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Stock and Bond Markets May Rally if U.S. Jobs Data Cools the Fed Outlook

By:Ilya Spivak

Meanwhile, stocks have shrugged off Fed Chair Powell’s Congressional testimony

  • The Federal Reserve interest rate cut outlook is unchanged after the central bank chairman’s testimony before Congress.
  • All eyes are now on February’s U.S. jobs report, where cooling is expected.
  • A soggy run of U.S. data hints cooling employment may stoke risk-taking.

Wall Street took remained calm during two days of highly anticipated Congressional testimony from Federal Reserve Chair Jerome Powell. He ably walked the tightrope between signaling rates have peaked and cuts are on the menu for 2024, and wanting more evidence on inflation before easing actually begins.

Fed rate cut outlook steady after Powell testimony

On balance, the policy path priced into Fed Funds futures still calls for 81 basis points (bps) in cuts this year. It has hovered near here for the better part of a month. After Mr. Powell’s testimony, it is trading a mere 1.5 bps lower compared with last week’s close. This puts the markets at the baseline set by the central bank’s latest forecast, issued in December.

This leaves sentiment at a key inflection point. A dovish adjustment bringing market pricing back toward 100bps in easing is likely to encourage risk-taking as yields come down, powering stocks higher and pressuring the U.S. dollar. A hawkish revision that moves the needle toward 50 bps would probably have the opposite effect.

Futures-implied FOMC outlook vs. S&P 500
Source: CME

All eyes are likely to turn to February’s U.S. employment report. It is expected to show nonfarm payrolls added 200,000 jobs, a downtick from January. The unemployment rate is seen holding unchanged at 3.7% for a third month straight. That’s only a hair above the 70-year low of 3.4% set in April 2023 and down from 3.8% in October 2023.

Stock and bond markets may cheer muted U.S. jobs data

U.S. economic news-flow seems to have cooled relative to economists’ forecasts in recent days having strongly outperformed since the beginning of the year. Soft manufacturing- and service-sector activity readings from the Institute of Supply Management (ISM) were followed by soggy job openings and ADP private payrolls numbers.

Tellingly, the Citigroup gauge measuring U.S. economic surprises has dropped to the lowest since late January, suggesting analysts’ models are coming closer in line with realized results. This hints at upside surprises beckoning a hawkish rethinking of the Fed outlook have become relatively less likely than the alternative.

On balance, this seems to put stocks and bonds on solid footing into the end of the week. If jobs data echoes the recent string of disappointments, a tilt toward more rate cuts in the priced-in policy path may stoke risk appetite as yields decline. The Japanese yen may outperform while the U.S. dollar suffers against this backdrop.

Citi U.S. economic surprise index
Source: Citigroup

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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