The US equities markets performed well last week on the back of the expectations that the Fed will keep its monetary policy on autopilot—the Fed will raise interest rates by 50 basis points at each of the next two sessions. However, the Fed’s monetary policy decision and the performance of the US stock market are inextricably linked, and one of them will be revealed today at 1230 GMT.
The Stock Market
The equities markets in the United States are still down considerably year to date (YTD). The S&P 500 index is down 13% ytd, the Dow Jones is down 9.22% year to date, and the Nasdaq index is losing the most, down more than 23% year to date. These indexes performed far worse two weeks ago, and it was only last week that bargain hunters stepped in to halt the bleeding. The sell-off was primarily motivated by concerns about stagflation, since inflation remains high and economic activity remains low. In addition, the Fed has implemented the most hawkish monetary policy in decades, believing that the US economy can sustain higher interest rates.
There is no doubt that market participants have become accustomed to loose monetary policy, and if it would have left town earlier, we would have witnessed a lot of market upheaval. However, with inflation at a multidecade decade high and the Fed’s most aggressive stance yet, speculators are concerned that the US economy may be crippled and the stock market could crash like there is no tomorrow if the Fed’s QE were to leave the picture.
However, the Fed has told market participants that they are closely monitoring US economic statistics and that their monetary policy is reliant on the strength and weakness of US economic indicators. The US NFP statistic, which is more important than any other piece of economic data, will be revealed today at 12:30 AM GMT. The forthcoming headline number is expected to be 325K, whereas the previous reading was 428K. If we see a similar trend again, it will increase the Fed’s confidence in its monetary policy, and the Fed is likely to continue on autopilot for the next several months, pushing the stock market upward.
Furthermore, it has only been one month since January when the US unemployment rate has fallen short of expectations, causing traders to be disappointed. The unemployment rate is expected to decrease to 3.5 percent today, down from 3.6 percent in the previous month. If the figure falls in line with predictions, the Fed will be under less pressure to maintain its present monetary policy stance. A similar incident might have a favourable impact on the US stock market.
The final element of the picture is the average hourly rate, which was 0.4 percent last month compared to 0.3 percent the previous month. Further improvement in the average hourly rate demonstrates the strength of the US job market and bodes well for the stock market.
Overall, looking at the US job market, the signals point to a continuation of the same pattern. Any minor surprise in the GDP report is likely to cause the US stock market to gradually climb. If the data deviates significantly from expectations, equities markets may roll over, wiping out their gains from the previous week. This is due to the fact that bad news for the economy, is bad news for the US stock market, and stock indexes will decrease as a result of stagflation worries. However, a high economic statistic may cause the markets to fall as traders begin to anticipate the Fed taking a more hawkish position in terms of more aggressive interest rate hikes.
To summarise, the impending US NFP report is the most critical event that will determine whether or not the stock market surge continues. As long as the number is near to the estimate, we might see the rising trend that began last week continue.