Hawkish Fed minutes and a market finding its footing

It was green across the board for US Stock market indexes at the close on Wednesday, with most S&P 500 names ending higher, adding 38 points (0.6%) to 6,881 overall. At the GICS sector level, energy led gains, followed by technology and consumer discretionary, while utilities and real estate posted the largest losses. The Nasdaq 100 wrapped up higher by 197 points (0.8%) to 24,898, along with the Dow Jones, which climbed 129 points (0.3%) to 49,662.

The AI sell-off that sent software names into a tailspin earlier this week appears to be running out of steam. Whether this reflects a genuine reassessment of valuations or simply opportunistic buying remains an open question.

Fed minutes: Wait, watch and hike?

The minutes from the January Fed meeting landed yesterday and tilted more hawkish than expected. Most of the participants – those who favoured keeping the policy unchanged – acknowledged that the current 3.50-3.75% rate is ‘within the range of estimates of the neutral level’.

Equally notable was the acknowledgement by a ‘number of participants’ that additional rate cuts may not be appropriate until disinflation is ‘firmly back on track’. Frankly, this is a rather high bar, given that PCE inflation – which is what the Fed uses to track inflationary pressures – is currently running nearer 3.0% than the 2.0% Fed target.

Interestingly, what I found most eye-opening was that ‘several participants indicated that they would have supported a two-sided description of the Committee's future interest rate decisions’. This essentially means that a large number of participants signalled that policy tightening is not off the table, particularly if price pressures remain elevated. It is also worth noting that most participants ‘cautioned that progress towards the Committee's 2 per cent objective might be slower and more uneven than generally expected’ and reiterated that economic growth is expanding at a solid pace.

Overall, the minutes were USD-supportive and emphasised that the Fed remains firmly in a wait-and-see mode. However, while the USD caught a bid, headwinds remain. These include the potential for a larger eventual Fed easing cycle than other central banks will deliver, and a deterioration in the labour market that forces a faster pace of easing.

Australian jobs data: The RBA has work to do

Overnight in Australia, the Bureau of Statistics released the January jobs report, which showed unemployment held at 4.1%, undershooting analysts’ estimates of 4.2%. Employment growth rose by 17,800, down from 65,200 in December, and moderately below the median forecast of 20,000. This figure reflects the total number of people who did ‘any’ paid work during the reference week – the entire employed population. While part-time work actually decreased by 32,700, you could say that the 17,800 gain was driven by a rise in 50,500 full-time roles.

In the immediate aftermath of the jobs report, as shown in the chart below, the AUD caught a bid versus DM currencies and remains higher across the board in early European trading.

With unemployment remaining relatively low, inflation tracking above the RBA’s 1-3% target band, and wage growth elevated (3.4% in Q4 25 YY), these data suggest the RBA still has work to do. Money markets are largely overlooking next month’s meeting, pricing in just 6 bps worth of hikes, though 20 bps of tightening is priced in for May.

Day ahead

• US weekly jobless filings (week ending 14 February) at 1:30 pm GMT.

Expected: 225,000; Previous: 227,000.

• Fed Bank of Philadelphia manufacturing index for February at 1:30 pm GMT.

Expected: 8.5; Previous: 12.6.

LSEG economic calendar