If you are involved in the markets it will pay to keep a close eye on a couple of US statistics in particular over the next few days – they will be key drivers behind the Federal Reserve’s next interest rate move in a fortnight and the immediate directions for shares, commodities and currencies.
The past five weeks have seen a big swing in sentiment in markets about economic growth, inflation, the path of interest rates and the approach of central banks to monetary policy – most of the change in attitude has been driven by better-than-expected data about various major economies, especially in the US.
The certitude of January has given way to uncertainty and a bit of angst on the part of many investors who were looking forward to a better year than the big losses seen in 2022.
The first trigger for the change of heart was the massive surge in jobs in January – 517,000, with another 47,000 found in December. The second and more important was the very mixed Consumer Price Inflation report for January, then the monthly report on producer prices and finally the Personal Consumption Expenditure (PCE) price index which confirmed that inflation had slowed its solid retreat from June’s peak of 9.1%.
That saw investors gradually forget the idea of a looming pause by the Fed as it waited to see the path of inflation. Instead there’s now a growing fear that rate rises will continue for longer, and perhaps at a 0.50% rate rather than 0.25%. And some see a recession, although most economists do not see that – yet.
Fed chair Jay Powell made sure that fear became deep rooted this week with his first semi-annual appearance before both houses of the US Congress.
Now, the monthly cycle starts again with a lot of gun-shy analysts and investors very nervously awaiting tonight’s (Friday) February jobs data and unemployment report and then next Tuesday’s CPI report for February.
Ahead of that Powell finished his Congressional testimony by making sure the House of Representatives Financial Services Committee understood that the actual decision at the central bank’s March 21 and 22 meeting would hinge on the data still to be issued – such as the jobs and inflation reports for February.
“If – and I stress that no decision has been made on this – but if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
That underlined the earlier message to the Senate on Tuesday, though he repeated the point that a decision has yet to be made – the decision being a rate rise of 0.25% or 0.50%.
“We have not made any decision,” Powell said, but will be looking closely at upcoming jobs data on Friday and inflation data next week in deciding whether rate hikes need to shift back into a higher gear.
As Powell spoke on Thursday, new job openings data showed there was still far more vacancies in the US economy than unemployed people willing to fill them – the Bureau of Labor Statistics data showed there was 1.9 jobs available for each unemployed person, which was again well above pre-pandemic levels.
Like we saw in mid-2022, there were some signs the labour market could be softening – overall job openings dropped slightly. The rate at which workers were quitting continued a gradual decline, a sign some of the pandemic job-hopping had slowed, while the layoffs increased.
But revisions to 2022 improved the picture, adding 200,000 more vacancies in December alone and the 10.8 million vacancies remains far above pre-pandemic levels with the jobless rate at a near record low of 3.4%.
Economists forecast there will be 210,000 new jobs reported on Friday and the jobless rate won’t change from 3.4%. Some thoughtful analysts think the February data will come in sharply lower than January simply for statistical reasons (‘give back’ when data after an outlier report slowly reverts to the mean).
The January report was so out of whack with the slow fall in new job openings in late 2022 as to be considered a one off. A reading above 300,000 would push the markets to believe that a rate rise of 0.50% in a fortnight from the Fed was a lock, even if inflation comes in better than expected.
At this stage the markets see a slight easing in the US CPI to an annual 6.2% in the report on Tuesday (March 14), which would be a nudge lower from January’s 6.4%. An unchanged 0.5% month on month rise is also forecast – not really a convincing outlook.
US markets have now priced in a rise of 0.50%, so if the Fed goes with a 0.25% rise there will be a relief rally for a while. If it’s a rise of 0.50%, then investors will sigh and try to construct another narrative for the next six weeks but the going could get rough.
Next week could be a rough ride if the data is uncertain, but the ride could be much smoother if jobs growth is weak and inflation dips by a bit more than expected.
