US equities markets performed well this week based on the expectations that the US economy may experience a soft landing. Traders are slightly more optimistic that the Fed’s current monetary policy may cause as much damage as previously anticipated. The Fed is on a hawkish monetary policy path, and it has made it clear that they want to bring inflation lower at any cost and their support is unconditional.
It is widely anticipated in the market that the Fed will not keep its monetary policy on autopilot—the Fed will increase or decrease the pace of the interest rate, and the range of this could be between the 50 to 75 basis mark in the upcoming mark.
In their recent FOMC Minutes released this week, the Fed didn’t have the latest US NFP number; hence traders didn’t pay too much attention to this. But the message was clear: the Fed is bringing the inflation numbers down.
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 11% year to date, the Dow Jones is down 8.22% 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 this and last week that we have started to see some bargain hunters stepping in to halt the bleeding. The sell-off has been 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 denying that market participants have become accustomed to loose monetary policy, and if it were to leave town, we would have witnessed a lot of market upheaval. However, with inflation at a multidecade decade high and the Fed’s most aggressive stance, speculators are concerned that the US economy will be crippled and the stock market will crash like there is no tomorrow.
However, the Fed has told market participants that they are closely monitoring US economic statistics and that their monetary policy relies on the strength and weakness of US economic indicators. The US NFP statistic, which stands higher than any other piece of economic data, will be revealed on Friday at 12:30 AM GMT. The forthcoming headline number is expected to be 260K, whereas the previous reading was 396K. If we see a similar trend again, it will increase the Fed’s confidence in its monetary policy. The Fed will likely 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 increase by a small margin to 3.6 per cent on Friday. If the actual 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 0.3 per cent last month compared to 0.3 per cent 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, the signals point to a continuation of the same pattern in the US job market. Any minor positive surprise in the US NFP report will likely cause the US stock market to climb gradually. If the data deviates significantly from expectations, equities markets may roll over, wiping out their gains from this week. This is bad news for the US stock market, and stock indexes will decrease due to 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 more aggressive interest rate hikes.
To summarize, the impending US NFP report is the most critical event to determine whether 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.