A March rate cut from the Fed looks like a pipe dream

Friday’s abnormally strong jobs data resonated like a bomb across the financial markets. The US economy added 353’000 nonfarm jobs last month versus the consensus of around 185’000 new job additions. The average wage growth unexpectedly accelerated to 4.5%, and the unemployment rate remained steady at 3.7%. Here we are, finding ourselves with an NFP number above 350’000 just a few weeks before the Federal Reserve (Fed) will presumably start cutting interest rates. The jobs numbers are looking great – to say the least, and the US economic growth continues to surprise to the upside. None of these numbers point to recession, or a need for the Fed to start cutting the rates. The only possible pain is the resurfacing regional banks worries. But besides that, nothing suggests that the Fed should be cutting the rates in March, or even in May.

As such, a March rate cut from the Fed looks like a pipe dream. Activity on Fed funds futures now gives less than 20% chance for a rate cut to happen in March. Remember, this probability stood at around 80% at the start of the year. And the probability of a May cut has fallen to around 70%, whereas the market was pricing a May cut near almost 100% before the jobs data.

The dramatic jobs number of Friday met a dramatic reaction from the bond markets. The US 2-year yield which best captures the Fed rate bets jumped more than 20bp, the 10-year yield jumped past 4%, and the US dollar index rallied past its 200-DMA and reached the highest levels since early December. The EURUSD slipped below the 1.08 level on a broad-based rally in the US dollar on Friday and hit my 100-DMA bearish target. Strengthening trend and momentum indicators, and a reasonable RSI index suggests that the euro selloff could extend. Next bearish target stands at 1.0710, the major 61.8% Fibonacci retracement on October to December rally. The USDJPY – which had started to have a taste of the 145s last week is back above 148, and Cable is back testing the 1.26 to the downside.

As we don’t have life changing data, the market will continue to digest the strong US jobs data. The latter could help the US dollar consolidate and extend gains. The most important events on this week’s economic calendar are the Chinese inflation numbers and the Reserve Bank of Australia (RBA) rate decision. Deflation in China is expected to have accelerated and the RBA is expected to keep its rates unchanged. The AUDUSD slipped below its 100-DMA and is testing the 65 cents support to the downside this morning. China’s inability to boost appetite, retreat in iron ore prices and now this strong US dollar should continue to weigh on the Aussie.

Stocks do their own thing

Interestingly – and happily, the jump in the US yields and the severe retreat in Fed rate cut bets didn’t impact the stock markets AT ALL. Stock traders were in such a great mood on Friday that the good jobs data was almost welcome as a sign of strong economic growth and good future earnings. Meta jumped 20% to a fresh all-time high, gained more than $200bn in market value in just one trading session - the biggest one-day gain in the history of one-day gains. Amazon jumped nearly 8% and is finally back to its long-term ascending trend. Nvidia hit a fresh record because – why not! And the S&P500 closed at a fresh record.

The funny thing is that about half of S&P500’s early year gains are due to Magnificent 7 stocks. The equal weight index has been completely flat. And with most of Big Tech earnings out of the way without much disappointment – on the contrary, there is nothing to worry about for the overall trend for the Big Tech. Whatever happens to Fed expectations, there is something good to trade. Bad economic news means sooner and faster Fed cuts. Good economic news means better corporate profits. What can go wrong?

Oil unreactive to US retaliation

The barrel of US crude fell to $72pb level last week and is not much higher this morning despite the US retaliation for last weekend’s attacks. The risk of escalation with Iran remains, but that risk is not being properly priced in. Trend and momentum indicators suggest that there is room for further slide. Any price rallies could be interesting tactical shorts targeting the $70pb level.