The four-month U.S. stock market rally, partly fueled by investor expectations for 2024 interest rate cuts by the Federal Reserve, will face a test posed by a pair of big events in the coming week.
First up is Federal Reserve Chair Jerome Powell’s biannual testimony to Congress on Wednesday and Thursday, followed by Friday’s official jobs report for February.
Of the two, nonfarm payrolls data has the potential to move markets more, given what it could signal about the risk that inflation could continue to rise if job gains surpass consensus expectations of 190,000, according to analysts and investors.
“Inflation has bottomed, but is still above the Fed’s target and it looks like more labor market weakness will be needed,” said John Luke Tyner, portfolio manager at Aptus Capital Advisors based in Alabama, which manages $5.5 billion in assets. “The headlines about technology-related layoffs miss the mark as there is a rebound in employment and wage growth in Central America.”
The January data proves it. February began with the release of January nonfarm payrolls data, which showed 353,000 jobs created and a strong 0.6% increase in average hourly wages for all employees, despite lower interest rates. highest in more than two decades.
Then came a batch of inflation data. Consumer and producer price data were both above expectations for January, followed by last Thursday’s release of the Fed’s preferred measure of inflation, known as PCE, which showed the monthly pace of underlying price gains rising to fastest pace in nearly a year. Meanwhile, personal income grew at a monthly rate of 1% in January.
Since then, Fed Funds futures traders have scaled back their expectations for rate cuts to as much as six or seven quarters of a percentage point by December, and have come closer in line with the three rate cuts that the Fed signaled would likely be appropriate. . However, this was still enough to give the Dow Jones Industrial Average DJIA and S&P 500 SPX their best start to the year since 2019, and fuel a four-month rally in all three major indexes. For the week, the S&P 500 rose 1% and the Nasdaq Composite gained 1.7%, but the Dow Jones slipped 0.1%, based on FactSet data.
Overall, Powell is expected to stick to his script, underscoring the need for greater confidence that inflation is falling toward the Fed’s 2% target before policymakers can cut the cash rate target. federal funds from the current range of 5.25% to 5.5%. analysts said. He is seen as reluctant to say anything that would move markets or rate expectations.
“Powell needs to avoid doing what he did in November and December, which is stimulate the market with a very bullish message suggesting that politicians could stop raising rates and that the next moves would be rate cuts,” Tyner said on the telephone. “The Fed must remain united on the need to be patient, not rush to cut rates, and to depend on data, with current data pointing to no cuts until the end of this year.”
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Aptus Capital’s strategies are based on the use of overlapping options to improve outcomes and the firm is “well positioned” to capture both upward and downward movements in the market thanks to a “disciplined approach on hedging in both directions”, the portfolio manager said.
Others see the possibility that Powell’s testimony to the House Financial Services Committee and the Senate Banking Committee will produce one of two non-basic outcomes: He could either dismiss expectations about the timing or size of the Fed’s rate cuts this year, or, On the other hand, there is a need to maintain rate cuts due to weaker inflation prospects and future economic data.
The rate market is the mechanism through which financial markets would likely react one way or another to Powell’s testimony and Friday’s nonfarm payrolls report, particularly with trading in federal funds futures and rate futures guaranteed overnight financing. Any reaction in the futures market would have a simultaneous impact on long-term Treasury bonds and risky assets, according to Mike Sanders, head of fixed income at Wisconsin-based Madison Investments, which manages $23 billion in assets.
Fed officials probably won’t have enough confidence that they will have won the battle against inflation by June, raising the question of whether markets are overestimating policymakers’ ability to start cutting rates by that month, Sanders said by phone.
“Fed officials are more or less committed to cutting rates when appropriate, but they worry that if they cut too soon they will have sticky inflation,” he said.
“The services side continues to be higher than the Fed wants, with much of the disinflation coming from the goods side,” Sanders said. Inflation dynamics “are not yet balanced from the Fed’s point of view, and the services side should worry policymakers, especially in light of the growth in personal income we have witnessed. It will remain status quo until the Fed knows whether the higher inflation data seen in January was a one-off or whether the situation continues.”
Analysts said they were particularly concerned about supercore inflation, a measure of primary services that excludes housing, which is still at levels that suggest the services side of the U.S. economy is performing across the board.
No major data is expected to be released from the United States on Monday. Tuesday reports January factory orders and ISM service sector activity data for February.
Data released Wednesday includes the ADP report on private sector employment, January data on wholesale inventories and job opportunities, and the Fed’s Beige Book report. Also San Francisco Fed President Mary Daly , will speak that day.
Thursday’s data includes weekly initial jobless claims, a review of fourth-quarter productivity, U.S. trade balance and consumer credit data. Cleveland Fed President Loretta Mester is also expected to attend. On Friday there will be a speech from New York Fed President John Williams and the final data on consumer confidence for February.