Jobs Friday

Yesterday’s European Central Bank (ECB) meeting and Lagarde’s press conference went according to the plan. The ECB left its rates unchanged for the fourth straight meeting, lowered its inflation forecasts, predicted that inflation will reach the 2% target by next year and suppressed its growth forecast for this year. Still, Lagarde said that they aren’t ‘sufficiently confident’ in inflation to lower rates but that they ‘will know a little bit more in April and that they will know a lot more in June’. It was heard as ‘we will start cutting the rates in June if inflation continues to ease as predicted’. The dovish message was well received from the market: the Eurozone bond yields fell, the Stoxx 600 hit a fresh record, but the EURUSD extended gains above the 1.0955 as the US dollar fell more than the euro did as the Federal Reserve (Fed) Chair Jerome Powell reiterated that rate reduction in the US ‘can and will begin’ this year.

Who will cut first?

Mr. Powell sounded more confidently dovish Madame Lagarde. While Lagarde said they are not confident enough to lower rates, the Fed head said that he and his colleagues are ‘waiting to become more confident that inflation is moving sustainably at 2%’, that ‘when they get that confidence, they will begin dial back the level of restriction’ and that they are ‘not far from it’!

You don’t need to repeat such a confident message twice. The US dollar index tumbled to the lowest levels since January, and the dollar bears now target the 100 mark on expectation that the Fed is done cooking the idea of a rate cut, they are just waiting for it to cool before bringing it on the table. The smell of that dovish cake sent  the S&P500 to a fresh record, of course. Nvidia gained another 4.5% - really I am not kidding – the company added another 4.5% yesterday just like that, whereas Broadcom – which also jumped more than 4% yesterday – fell 3% in the afterhours trading after announcing disappointing sales last quarter. Happily, the company highlighted that their AI demand is growing and that’s all that matters.

A different game is played in Asia

Japanese stocks fell below 40’000 level as the USDJPY tumbled below the 148 level on rising speculation that the Bank of Japan (BoJ) could be closer to exiting the negative rates than many think. The most aggressive hawks bet that the BoJ will already hike rates at their March meeting. I think that they will – in the best case scenario – hint that there could be a hike in April. But you never know with the BoJ.

The growing divergence between more hawkish BoJ expectations and more dovish Fed expectations should back a USDJPY decline to at least 140. Then, depending on how hawkish the BoJ sounds, we shall see the USDJPY ease to 125/130 level. But be careful because the BoJ will unlikely to raise its rates at the same speed than the ECB or the Fed did. The chances are that the BoJ will move slowly. Hence, the road below the 140 could be choppy.

Beyond Japan, the rebound in Chinese stocks began losing steam this week, as the government’s 5% growth and 3% inflation target looked overstretched and yesterday’s jump in trade numbers were ignored, as investors realized that the boost was due to the fact that the January and February data is announced together to avoid the Chinese New Year fall in activity. The iShares MSCI China ETF saw the biggest one-day outflows on Wednesday since last December.

Jobs Friday

Due today, the US jobs numbers could further boost the dovish enthusiasm… or not. Note that the last two readings were abnormally strong with NFP reads above 300K mark. The latter interrupted the downtrend in US payrolls – a downtrend that was in play following the post-pandemic peak.

But on the other hand, other metrics – like lower job openings and lower quit rates – hint that there is a normalization and a certain loosening in the US jobs market. The quit rates for example fell below the pre-pandemic average hinting that the Great Resignation era is leaving its place to Great Stay and that means a possible downward pressure on wages growth.

The US economy is expected to have added around 200K jobs last month, and the monthly average pay may have increased at a slower speed. Unemployment rate is seen steady at 3.7%. If the data is sufficiently soft – or ideally softer than expected, the Fed doves will finish the week on a dominant note. But if we see another month of blowout jobs report, confusion will reign.

But in all cases, what matters the most is inflation. Even if the US jobs data comes in hot, if next week’s US CPI read is soft enough, investors will continue to daydream about that first rate cut. Oh that first rate cut…