U.S. NFP Preview: Stocks and the Dollar May Keep Falling on Recession Fears

Recession risk is in focus for the markets before U.S. jobs data and a speech from Fed Chair Powell

• Lackluster U.S. employment statistics may add to growing recession fears
• A measured speech from Fed Chair Powell might disappoint the markets
• Stocks and the U.S. dollar may keep falling as Treasury bonds push higher

Headlines from the White House and their expected repercussions have preoccupied financial markets so far this week, pulling stocks lower as traders try to make sense of seesawing trade policy and sending the euro amid bets on a defense spending boom. The spotlight returns to global growth and interest rates for the finale.

First, the Bureau of Labor Statistics (BLS) will publish the closely watched monthly report on U.S. employment. It is expected to show that the economy added 160,000 jobs in February, a modest uptick from the prior month’s rise of 143,000. The unemployment rate is seen holding unchanged at 4%, the eight-month low set in January.

Soft U.S. jobs data may amplify growing recession fears

Analytics from Citigroup suggest that U.S. economic data outcomes have increasingly deteriorated relative to consensus forecasts since mid-November. They now tend toward underperformance. This implies that the economy is returning weaker results than economists anticipated, and that their models are yet to be adequately adjusted.

This might foreshadow still more disappointment in the jobs report. That would come at an inconvenient time, as markets increasingly fret about the threat of incoming recession after sobering S&P Global purchasing managers index (PMI) data revealed a shocking slowdown in the U.S. service sector.

After the numbers cross the wires, investors will turn to a speech from Federal Reserve Chair Jerome Powell to help them make sense of what comes next. So far, the upswell in recession fears has understandably forced a dovish rethink of monetary policy expectations.

Benchmark Fed Funds interest rate futures now price in 93 basis points (bps) in rate cuts through the end of 2026. That broadly lines up with the Fed’s own projection of 100bps in December, but it is sharp revision from the markets’ prior vision of 43bps just three weeks ago.

Will Fed Chair Powell endorse swelling rate cut speculation?

The expected timeline for stimulus delivery has also become more urgent. Traders are pricing 72bps in cuts for 2025, implying that three standard-sized 25bps reductions are front-loaded in the near term. Another step down then follows in 2026. For its part, the Fed marked down a more leisurely 50bps per year.

That was before the latest run of soggy data flow, and traders will be keen to hear from Mr. Powell if their latest clamoring for policy support is being heard loudly enough to spur officials into action. He will almost certainly acknowledge what appears to be occurring. Nevertheless, a headlong dovish leap appears unlikely.

For months, Mr. Powell has stressed that the Fed is in the fine-tuning phase of balancing its dual objectives, taking its time and avoiding overreaction to incoming data. That is meant to carefully guide inflation toward 2% without derailing the labor market. It may seem erratic to change course all at once. That may backfire by spooking markets.

On balance, a lackluster set of employment figures coupled with what may appear like insufficient boldness from the Fed Chair might keep the mood defensive on stock markets as growth concerns continue to fester. Bonds at the long end of the curve may rise as future rate cut speculation builds, depressing yields. The U.S. dollar may fall 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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