Data-dependent Federal Reserve could suggest that even a milder jobs report next Friday, and a lower CPI inflation rate the following week, would still lead to a quarter point increase in rates on March 22. You shouldn't bet. Fed chair Jerome Powell’s Senate testimony on Tuesday, which slapped the S&P 500 rally, almost ruled such a result out.
Powell's main line: "If all the data indicate that a faster tightening of monetary policy is necessary, we are prepared to accelerate the rate increases."
Even a few cooler economic reports will not be enough to cool down the "totality of data" temperature for the Fed.
S&P 500 stocks fell again on Thursday, despite the fact that jobless claims rose more than expected in the week ending March 4, to 211,000. S&P 500 may bounce if tomorrow's jobs data is weaker than expected. It would take an incredibly bad report to change the Fed's hawkish consensus, which will put pressure on stocks in the near term.
Wall Street economists anticipate that February's jobs report will show an increase of 220,000 jobs. Even a huge downside surprise, such as 100,000 new jobs, would mean that the economy had added more than 300.000 jobs each of the two first months of the year, which is way too much for the Fed.
The unemployment rate will remain at 3.4%, a record low for 53 years. The average hourly wage is forecast to grow by a modest 0.3% over the course of the month. The wage inflation rate is expected to rise from 4.4% in Feb. 2022, when a month with flat wage growth was recorded, to 4.7% in March.
Powell said that the unseasonably warm temperatures in January 2022 may have contributed to the softer economic trend in late 2022. The economists at Deutsche Bank, however, are forecasting that the weather was also unusually warm mid-February during the week the Labor Department conducted its monthly employer survey.
Aneta Markowska, chief financial economist at Jefferies, writes that the "payback" from strong hiring due warm weather will come between March to May.
The Fed has no time left to change its mind about a half-point hike in rates on March 22, despite the lack of data.
It is likely that inflation data will be no different. Powell stated on Tuesday that he saw "little evidence of deflation" among the core non-housing services which account for around half of PCE.
Core PCE service prices excluding housing increased 0.6% in January, the highest since November 2021 and by 4.65% compared to a year earlier. In this category, the 3-month annualized rate of inflation jumped to 5.3%.
The Fed will not see the PCE data for February until after its policy announcement on March 22. Consumer price index, due on March 14, will give some clues. A single month's worth of data will not change the public's opinion.
The odds of a Fed meeting in just two weeks resulting in a half point hike jumped from 30% to 80% on Monday, then to 63% on Wednesday. These odds could fall if the CPI and Friday's employment report are both lower than expected.
The Fed faces a very high hurdle in settling for a quarter point hike. Two reasons are behind this.
Fed officials first believe that the costs associated with not raising rates enough are greater than those of raising them too high. The longer the high inflation continues, the more difficult it will be to stop it. Powell said that the 15-year period of high inflation from the late 1960s until the early 1980s taught us this lesson. The Fed does not want a recession but officials do not lose sleep about it because they have had success in reviving an economy that was sick with rate reductions and asset purchases.
Second, Fed officials have failed to convince the markets, up until recent, that rates will rise and remain there for a longer period. This had serious consequences. Treasury yields dropped, which helped lower borrowing costs and gave the economy a new wind. Since the markets have finally listened to the Fed, it is unlikely that policymakers will want to raise rates less than what markets expect, as that would ease financial conditions.
The Fed is looking for a slowdown as soon as possible. S&P 500 earnings will likely take a hit when it happens, well before Fed policy is loosened.
S&P 500 fell 1.8% on Thursday, following a 0.1% gain on Wednesday. The S&P 500 had fallen by 1.5% on Tuesday, when it broke through its 50 day moving average. The S&P 500 slightly undercut the 200-day moving average on Thursday. The S&P 500 rally would be in danger if the 200-day moving median, located near 3940 was broken decisively.
The S&P 500 closed on Wednesday 16.8% below the record high, but was still up 11,6% from the bear-market low of Oct. 12
The 10-year Treasury yield climbed back up to 4% on Thursday morning, but then eased down to 3.92% following the increase in unemployment claims and the market's selloff. The yields on short-term Treasury bonds with maturities up to one year are still above 5%. This means that the yield curve has inverted and is indicating a high risk of recession.
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Investor's Business Daily published the article Why Friday's Jobs Report Willn't Save S&P from Fed Hawks.