U.S. Stock Market Rally Faces Test with Fed Chairman’s Testimony and Jobs Report
Investors are eagerly awaiting two major events this week that could potentially impact the four-month-long U.S. stock market rally. Federal Reserve Chairman Jerome Powell’s semiannual testimony to Congress and the official jobs report for February are expected to provide crucial insights into the future of the market.
Nonfarm payrolls data, in particular, has the potential to move markets significantly. Analysts and investors believe that if job gains come in above the consensus expectation of 190,000, it could signal a risk of inflation running hot. John Luke Tyner, a portfolio manager at Aptus Capital Advisors, explains, “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.”
January’s data supports this argument. Despite the highest interest rates in over two decades, the release of January nonfarm payrolls showed 353,000 jobs created and a sharp 0.6% rise in average hourly earnings for all employees. Additionally, inflation data for January exceeded expectations, with consumer- and producer-price readings both above forecasts. The Fed’s preferred inflation measure, known as the PCE, also showed a monthly pace of underlying price gains rising at the fastest pace in almost a year.
These developments have led Fed-funds futures traders to revise their expectations for rate cuts. While initially anticipating as many as six or seven quarter-percentage point rate cuts by December, they have now aligned their predictions with the three reductions signaled by the Fed. Despite this adjustment, the Dow Jones Industrial Average and S&P 500 have experienced their best start to a year since 2019, fueling a four-month rally in all three major indexes.
As Powell prepares to testify before Congress, market participants are curious about his stance on rate cuts. Analysts believe he will emphasize the need for greater confidence in falling inflation before considering a cut. Powell is expected to avoid making any statements that could significantly impact markets or rate expectations. According to Tyner, “The Fed needs to remain unified about the need to be patient, with no rush to cut rates, and about being data dependent, with the current data pointing toward not cutting until later this year.”
While Powell’s testimony is highly anticipated, there are two possible non-base-case scenarios that could arise. He may push back on expectations regarding the timing or extent of rate cuts this year. Alternatively, he could hint at the need for maintenance rate cuts due to prospects of softer inflation and economic readings in the future.
The rates market will likely react to Powell’s testimony and Friday’s nonfarm payrolls report. Trading in fed-funds futures and Secured Overnight Financing Rate futures will impact longer-term Treasurys and risk assets. Mike Sanders, head of fixed income at Madison Investments, explains, “Fed officials are more or less committed to cutting rates when appropriate, but are concerned that if they cut too soon they’ll have sticky inflation.”
Analysts express particular concern about supercore inflation, which measures core services excluding housing. It is still running at levels that suggest the services side of the U.S. economy is performing exceptionally well. The Federal Reserve will closely monitor inflation dynamics and assess whether the higher inflation prints seen in January were a one-off or a continuing trend.
In terms of upcoming data releases, Tuesday brings January factory orders and ISM service sector activity figures for February. Wednesday includes ADP’s private-sector employment report, January readings on wholesale inventories and job openings, and the Fed’s Beige Book report. San Francisco Fed President Mary Daly is also scheduled to speak on Wednesday. Thursday’s data batch includes weekly initial jobless benefit claims, a revision on fourth-quarter productivity, the U.S. trade balance, and consumer-credit figures. Cleveland Fed President Loretta Mester is also set to make an appearance. Finally, Friday brings an appearance by New York Fed President John Williams and final consumer-sentiment data for February.
As investors brace themselves for these significant events, the stock market rally hangs in the balance. The outcome of Powell’s testimony and the jobs report will undoubtedly shape market expectations and potentially lead to significant movements in various asset classes.