S&P 500 subdued near 4700 as trader focus shifts to NFP and its impact on the probability of March “lift-off”

As traders continue to digest Wednesday’s hawkish Fed minutes, which at the time sent US equities tumbling, and discuss its implication for the outlook for Fed policy tightening, US equity trade has been much more subdued. The S&P 500 has pivoted either side of the 4700 level on Thursday between 4670 lows and 4720ish highs and at current levels, pretty much bang on the big figure is trading about 0.3% lower on the day. That leaves it roughly 2.5% below the record levels printed near 4820 earlier in the week.

The Nasdaq 100 index, which tumbled more than 3.0% on Wednesday as sharp upside in yields triggered selling in so-called “growth” stocks (which include big tech), is about 0.2% lower in the 15,700s. The Dow, which held up comparatively better on Wednesday, dropping just over 1.0% at the time, is underperforming on Thursday and is down about 0.6% but still well above the 36K mark. In terms of the sectors, as yields continue to press higher the S&P 500 financial sectors outperformed and gained nearly 1.5%. The S&P 500 CBOE volatility index or VIX was broadly flat just below 20.00, having risen from around 17.00 when equities sold off on Wednesday.

Attention turns to NFP

Having largely ignored the week’s busy slate of tier 1 US data thus far, equity investors are now turning their focus to the release of the official US labour market report on Friday. With money markets now pricing a strong possibility of a first Fed rate hike in March, traders will be looking at Friday’s jobs report through the lense of whether it boosts or hinders the chances of March lift-off. Note that the Fed in December framed the labour market as making “rapid” progress back to full employment, even in light of December’s sub-par non-farm payrolls number of 210K and has said that if this rate of improvement continues, rate hikes will soon be warranted.

The Fed is likely looking through softer monthly NFP numbers so long as measures of slack (the unemployment rate) show signs of improvement. Indeed, unemployment dropped to 4.2% in November from 4.6% in October. Fed policymakers have acknowledged that the pandemic is holding people back from the labour market (hence why the participation rate remains well below pre-pandemic levels), meaning the scope for large MoM employment gains in the foreseeable future at present is limited.

As long as measures of slack continue to point to a tight labour market (as other data releases this week did), the bar is low for Friday’s headline NFP number to fulfill the Fed’s continued rapid progress criteria. Consensus expectations for 400K jobs having been created in December easily fits this bill. If Friday’s jobs report does feed into the Fed tightening fears that have in recent days sent real and nominal yields scorching higher and weighed on equities (with the pain most concentrated in), the outlook for equities on Friday could be grim.