The U.S. stock market rally, which has been going strong for four months, may face a test in the coming week due to two major events: Federal Reserve Chairman Jerome Powell’s testimony to Congress and the release of the official jobs report for February. These events have the potential to impact investor expectations for interest rate cuts and the overall direction of the stock market.
Analysts and investors believe that the jobs report may have a larger impact on the market, as it could signal the risk of inflation if job gains exceed expectations. Despite the highest interest rates in more than two decades, January’s nonfarm payrolls data showed 353,000 jobs created and a significant rise in average hourly earnings for all employees. This suggests that there is a resurgence of employment and wage growth in Middle America, contrary to the headlines about technology-related layoffs.
Inflation data has also been higher than expected, with consumer- and producer-price readings both coming in above expectations for January. The Federal Reserve’s preferred inflation measure, known as the PCE, showed a monthly pace of underlying price gains rising at the fastest pace in almost a year. Meanwhile, personal income grew at a monthly rate of 1% in January.
These developments have caused traders to revise their expectations for interest rate cuts by December. While some had anticipated as many as six or seven rate cuts, they are now aligning their expectations with the three reductions that the Fed had signaled as appropriate. Despite this adjustment, the stock market has still seen a strong start to the year, with the Dow Jones Industrial Average and S&P 500 experiencing their best performance since 2019.
As Powell prepares for his testimony, analysts expect him to emphasize the need for greater confidence in falling inflation before considering rate cuts. He is unlikely to make any statements that could significantly impact the markets or rate expectations. The Fed’s focus is on being patient and data-dependent, with no rush to cut rates until later in the year.
There are two possible outcomes from Powell’s testimony. He could push back on expectations for rate cuts, or he could hint at the need for maintenance rate cuts due to softer inflation and economic readings in the future. The rates market, specifically fed-funds futures and Secured Overnight Financing Rate futures, will likely react to Powell’s testimony and the jobs report. This reaction would have an impact on longer-term Treasurys and risk assets.
Analysts express concerns about supercore inflation, which measures core services excluding housing. This measure suggests that the services side of the U.S. economy is performing well. The Fed is cautious about cutting rates too soon and risking sticky inflation. They want to see if the higher inflation prints from January were a one-off or if they will continue.
The week ahead is filled with data releases and appearances by Fed officials. Investors will closely watch these events for any indications of the future direction of interest rates and the stock market.
In conclusion, the stock market rally faces a test with Powell’s testimony and the jobs report. While investors have been expecting interest rate cuts, stronger-than-expected job gains and inflation data may change these expectations. Powell is expected to focus on falling inflation before considering rate cuts, and any statements he makes during his testimony could impact the markets. Traders will closely watch the rates market for reactions to Powell’s testimony and the jobs report. Overall, the week ahead will provide important insights into the future direction of interest rates and the stock market.
