U.S. Stock Market Rally Faces Test from Fed Chairman’s Testimony and Jobs Report
The four-month-long rally in the U.S. stock market, driven in part by investor expectations for interest rate cuts in 2024, is set to face challenges this week. The first is Federal Reserve Chairman Jerome Powell’s semiannual testimony to Congress on Wednesday and Thursday, followed by Friday’s official jobs report for February.
Analysts and investors believe that the nonfarm payrolls data has the potential to have a greater impact on the markets. If job gains come in higher than the consensus expectation of 190,000, it could signal a risk of continued inflation, which could impact market movements.
John Luke Tyner, a portfolio manager at Aptus Capital Advisors, argues that there is a resurgence of employment and wage growth in Middle America, contradicting the headlines about technology-related layoffs. He states, “Inflation has bottomed out, but is still above the Fed’s objective and it seems like more labor-market weakness is going to be needed.”
Recent data supports Tyner’s argument. The release of January nonfarm payrolls showed 353,000 jobs created and a significant rise in average hourly earnings. Additionally, inflation data for January exceeded expectations, and the Fed’s preferred inflation measure indicated the fastest pace of underlying price gains in almost a year. Personal income also grew at a monthly rate of 1% in January.
These developments have caused traders to lower their expectations for rate cuts by the end of the year. However, the stock market has still experienced positive growth, with the Dow Jones Industrial Average and S&P 500 having their best start to a year since 2019.
As Powell prepares for his testimony, analysts predict that he will emphasize the need for greater confidence in falling inflation before considering rate cuts. He is expected to avoid making any statements that could disrupt the markets or rate expectations.
Some believe that Powell’s testimony could have two non-base-case outcomes: either pushing back on rate cut expectations or hinting at the need for maintenance rate cuts due to softer inflation and economic readings going forward.
The reactions in the rates market, specifically in fed-funds futures and Secured Overnight Financing Rate futures, will likely impact longer-term Treasurys and risk assets. Analysts question whether the markets are overestimating the Fed’s ability to start cutting rates by June, given the ongoing inflation concerns.
Analysts are particularly concerned about supercore inflation, which measures core services excluding housing. This measure suggests that the services side of the U.S. economy is thriving.
This week, major U.S. data releases include factory orders, ISM service sector activity figures, ADP’s private-sector employment report, wholesale inventories and job openings, the Fed’s Beige Book report, and weekly initial jobless benefit claims.
Investors will closely watch Powell’s testimony and the jobs report to gauge the future trajectory of the U.S. stock market and the potential impact on interest rate cuts.
Analyst comment
Neutral news. The U.S. stock market rally faces challenges this week from Fed Chairman Powell’s testimony and the jobs report. If job gains exceed expectations, it could signal continued inflation, impacting market movements. Analysts predict Powell will emphasize falling inflation before considering rate cuts. Reaction in rates and risk assets will be influenced. Concerns about supercore inflation and ongoing inflation concerns persist. Investors are closely watching these events to determine the market’s future trajectory and potential impact on interest rate cuts.
