Indices rally on stronger jobs report, but data negative for rate cuts

Wall Street rallied on this morning’s strong jobs data, as traders digest this week’s comments from the Federal Reserve, and the continuing saga of worrisome news from the regional banking sector. Today is a risk-on day for indices even as the promise of interest rate cuts is diminished.

Fed’s data-driven approach challenged by Jobs report

Today’s blow out Non-Farm Payroll (NFP) numbers are going in the wrong direction for the Federal Reserve to tame inflation. We suspect that the Fed’s policy language may have leaned even more hawkish had it seen this morning’s numbers. The markets priced in expectations that we had hit peak interest rates this week, with at least three rate cuts coming before the end of the year, even though Fed Chair Jerome Powell clearly stated on Wednesday that any rate cuts would be inappropriate this year.

Wall Street thinks Fed must still be cautious

Wall Street believes Jerome Powell is sincere, but it doesn’t believe that he will have any choice than to be cautious, with regional banks still seemingly failing (or being presumed so by markets.) Wall Street believes that the Fed will find it necessary to pull back on interest rates to ease the pressure on these banks, and to restore confidence in the American public in the banking sector. The Fed, on the other hand, continues to indicate that inflation is enemy number one, and that it is determined not to repeat the mistake that it made in 1980 when it pivoted too soon. This morning’s data provides more ammunition for the hawks on the Fed policy committee fearing that wage inflation will keep inflation hot. The Fed did leave the door open for a pause in rate hikes, which Wall Street sees as the first sign by the central bank that it recognizes problems within the banking sector that it believes will eventually necessitate rate cuts. Yet Powell’s statement would be data-driven, and the NFP doesn’t argue for a pause.

Loan Officer’s survey is a new data point for markets

In a new twist, Powell referenced data from the Fed’s Senior Loan Officer Opinion Survey (the ‘SLOOS’) when discussing how the banking crisis has done some of its work, which will continue to be a part of its assessment at policy meetings. This survey reveals that regional banks are tightening their standards for loans and credit cards. And this, in turn, has the effect of reducing economic investment and activity, which acts to slow the economy apart from the Fed’s higher interest rates and monetary tightening designed to do the same.

Strong fiscal stimulus makes the Fed’s task tougher

As such, the crisis can do much of the work for the Fed, although we would argue that it still needs to remove money from the system via tightening to avoid a return of inflation once the crisis has passed. Complicating matters is the rapid expansion of fiscal spending, which is projected to triple the government’s interest rate obligations to more than $1.6 trillion per year in the next four years, which may pressure the Fed to print more money, adding to inflation again.

All eyes on June FOMC meeting

The Fed says that it did not even address the possibility of a pause at this week’s meeting, but it will consider it at the next meeting. Top topics at that meeting impacting such a decision are expected to be further developments in the banking sector in the weeks ahead, the ability – or lack thereof – of Congress and the President to agree on a debt extension by the anticipated deadline somewhere around June 1, one more monthly jobs report on top of this morning’s data, and an anticipated increase in inflation reported for the month of April.

Blow out jobs report

• The economy created 253,000 non-farm payroll jobs in April, considerably above analyst expectations of 178,000 jobs, and up from 165,000 the previous month (which was a downward revision from 236,000)
• The unemployment rate fell to 3.4%, below analyst expectations that it would rise to 3.6%, and down from 3.5% the previous month
• The jobs participation rate remained unchanged at 62.6%.
• Average hourly earnings rose by 0.5% month-on-month in April, up from analyst expectations that they would remain unchanged at 0.3% gains
• That puts average hourly earnings up 4.4% year-on-year, up from analyst expectations of 4.2% and up from 4.3% the previous month

Current inflation data suggests no slowing in the pace of core inflation

• The Cleveland Fed’s nowcast for inflation projects the headline April consumer price index at 5.19% year-on-year, with core CPI up 5.56% year-on-year
• This implied inflation data is another reason why Powell and the Federal Open Market Committee deem rate cuts to be inappropriate this year

Indices rally, VIX falls, bonds fall

• At the time of writing, the broad S&P 500, NASDAQ and Russell 2000 indices were head by 1.4%, 1.6% and 1.8%, respectively
• The VIX, Wall Street’s fear index, fell by 11% to 18
• The dollar index was flat up by 0.3% to 101.3, with the Euro/Dollar off by 0.1% and Dollar/Sterling up by 0.3%
• Yields on 2- and 10-year Treasuries rose to 3.89% and 3.44%, respectively

Gold falls back to the 2K mark, oil rallies strongly

• Gold prices fell by 2.3% to $2,007 per ounce
• Crude oil prices rose by 4.5% to $71.7 per barrel
• Grain and oilseed markets were mostly higher in a recovery bounce

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com