MARKETSThe blistering US jobs report further strengthens the case that a rate cut as early as May is increasingly unlikely, even more so with several Wall Street corners still harboring doubts about the trajectory of inflation, a sentiment shared by Jay Powell and the FOMC.Indeed, high-frequency economic indicators continue to surprise on the upside, particularly regarding goods pricing. If these trends persist, they could potentially hinder, or even reverse, the progress made in containing headline inflation.Given the recent track record of economic and inflation forecasts, it’s reasonable to assume that the Fed will be cautious, especially regarding the aggressive rate cuts currently priced into the forward curve.But one exceedingly positive deflation inflection was the steep fall in oil prices this week as Israel and Hamas inch ever closer to a truce, which also unclogs supply chains via the Red Sea transport routes.Still, in light of the strong US consumer and a haughty jobs report, uncertainty surrounding economic and inflation forecasts remains elevated, necessitating a risk management approach to monetary policy. As such, the Fed will likely proceed cautiously, closely monitoring economic indicators and adjusting policy as necessary to navigate the evolving landscape.Despite this subtle, more hawkish lean, through the US AI Mega Cap Tech exceptionalism channel, Wall Street continues to perform strongly, a testament to robust US growth driving earnings. At the same time, strong balance sheets make Mega Tech somewhat immune to delays in the Fed cuts while continuing to deploy resources into AI initiatives.Investor’s concern surrounding the potential impact of higher yields on equities is understandable, particularly given the recent negative correlation between stocks and bond yields.However, it’s essential to recognize that economic growth has historically had a more significant impact on equity returns than movements in the yield curve. During periods of robust economic expansion, stocks have tended to deliver the most substantial returns. Still, this historical trend takes on a very bullish nuance when you factor in the strong possibility that later in the year, the Fed might consider cutting interest rates as inflation falls to prevent passive tightening through the real rates channel.In essence, the economy’s strength often outweighs the influence of yield curve dynamics on equities, as it did when the S&P 500 index reached a new all-time high of 4894 on January 25th while the 10-year Treasury yield rose by 27 bp YTD to 4.2%Therefore, investors should also focus on broader economic indicators and trends to gauge the potential direction of equity markets while remaining mindful of monetary policy decisions and their implications for FX and Commodity market dynamics.On Friday, the S&P 500 surged to a new all-time high, driven by robust quarterly earnings from technology giants such as Meta, the parent company of Facebook. The positive momentum in the market followed a better-than-expected jobs report.The S&P 500 index rose by 1.2%, surpassing its previous record high of 4,927.93 earlier in the week. Similarly, the Dow Jones Industrial Average increased by 201 points, or 0.5%, while the Nasdaq Composite climbed by 1.7%.The strong performance of technology companies, coupled with positive economic indicators, contributed to the market’s bullish sentiment, driving significant indices to new heights.
FOREX MARKETSFriday’s remarkably robust report on the US labor market sent shockwaves throughout the rates complex, sparking significant movements at the short end and providing substantial support for the US dollar.Following the release of the Non-Farm Payrolls data, two-year US yields surged nearly 20 basis points. The report not only revealed a stellar headline figure but also included upward revisions to job additions in 2023 and, notably, a substantial month-on-month increase in average hourly earnings.The swift sell-off in two-year yields marked the year’s most pronounced move thus far, nullifying the rally prompted by concerns surrounding regional banks earlier in the week.The implications for the US dollar were clear: Strength. Friday was poised to witness the greenback’s second-largest rally of the year, which has already seen a 2.5% increase in 2024.As mentioned on Friday morning, the likelihood of a March rate cut appeared improbably low. I’m referring to my subjective assessment rather than market pricing, which comprises many IRS market hedgers. Despite potential skepticism directed at various statistical methodologies used by the BLS, the implications of the jobs report were clear for the markets. It was too strong for a March cut and will now shake the trees on May cut probabilities.
OIL MARKETSOn Friday, the oil prices decreased because Israel and Hamas seemed to be getting closer to a cease-fire deal. Hamas is also expected to release some of the hostages held by them in Gaza. The risk of a truce over the weekend likely caused short-term speculative longs to head for the exits. Price gains were already limited due to China’s slow economy, and now, the higher rates in the US further complicate matters via the FX channel. As the Yuan is weaker, it hurts China’s oil importers. And now, with the geopolitical risk bid evaporating, Brent crude could test $75 next week, although the robust US economic data could limit the downward slide in WTI. Overall, because of the weather-related disruption noise and heightened geopolitical risk, the physical market could be long barrels, and with both tails easing, the physical market brokers might be forced to dump more short-term barrels if a cease-fire comes to fruition.More By This Author:
A Scorching Jobs Report
