Friday’s abnormally strong employment data resonated like a bomb in financial markets. The U.S. economy added 353,000 nonfarm jobs last month, compared to the consensus of about 185,000 new jobs. Average wage growth unexpectedly accelerated to 4.5% and the unemployment rate remained stable at 3.7%. Here we are, finding ourselves with an NFP figure over 350,000 just weeks before the Federal Reserve (Fed) presumably begins cutting interest rates. The employment numbers look excellent, to say the least, and US economic growth continues to surprise on the upside. None of these numbers point to a recession or the need for the Federal Reserve to start cutting rates. The only possible pain is the resurgence of regional banks’ concerns. But other than that, there’s nothing to suggest the Federal Reserve should cut rates in March, or even May.
Therefore, a rate cut by the Federal Reserve in March seems like a pipe dream. Activity in fed funds futures now offers a less than 20% chance of a rate cut in March. Let us remember that this probability was around 80% at the beginning of the year. And the probability of a May cut has fallen to around 70%, while the market was pricing in a May cut close to almost 100% ahead of the jobs data.
Friday’s spectacular jobs number sparked a dramatic reaction from bond markets. The one that best captures Fed rate bets jumped more than 20 bps, surpassed 4% and surpassed its 200-day DMA and reached the highest levels since early December. It fell below the 1.08 level in a broad rally on Friday and hit my bearish target of 100-DMA. Strengthening trend and momentum indicators and a reasonable RSI index suggest that the euro sell-off could extend. The next bearish target is at 1.0710, the main 61.8% Fibonacci retracement of the October-December rally. The – which had started testing 145 last week is back above 148, and the Cable is again testing the 1.26 level to the downside.
With no life-changing data, the market will continue to digest the strong US employment data. The latter could help the US dollar consolidate and extend its gains. The most important developments on the economic calendar this week are the Chinese inflation numbers and the Reserve Bank of Australia’s (RBA) rate decision. Deflation in China is expected to have accelerated and the RBA is expected to keep rates unchanged. It fell below its 100-day DMA and is testing the 65 cent support on the downside this morning. China’s inability to stimulate appetite, falling iron ore prices and now the strength of the US dollar should continue to weigh on the Australian dollar.
Actions do their thing.
Curiously, and fortunately, the jump in US yields and the severe pullback in Fed rate cut bets did not affect stock markets at all. Stock traders were in such good spirits Friday that the good jobs data was almost welcomed as a sign of strong economic growth and good future earnings. Meta (NASDAQ:) jumped 20% to a new all-time high, gaining over $200 billion in market value in just one trading session – the largest one-day gain in the history of one-day gains. Amazon (NASDAQ 🙂 jumped almost 8% and is finally back on its long-term uptrend. Nvidia (NASDAQ 🙂 hit a new high because why not! and closed with a new high.
The funny thing is that about half of the S&P 500’s early-year gains are due to Magnificent 7 stock. The equal weight index has remained completely stable. And with most of Big Tech’s profits wiped out without much disappointment; On the contrary, there is nothing to worry about the general trend of Big Tech. Whatever happens with the expectations of the Federal Reserve, there is something good to trade on. Bad economic news means sooner and faster Federal Reserve cuts. Good economic news means better corporate profits. What can go wrong?
Oil does not react to US retaliation
Oil fell to $72 a barrel last week and is not much higher this morning despite US retaliation for last weekend’s attacks. The risk of escalation with Iran persists, but that risk is not being adequately assessed. Trend and momentum indicators suggest there is room for further decline. Any price rally could be an interesting tactical sell targeting the $70 per trillion level.