Two events crucial for rate cut this week
This week, Federal Reserve Chairman Powell will attend a congressional hearing to present the semi-annual monetary policy report, followed by the release of the February non-farm payroll report by the U.S. Department of Labor.
March 6th to March 7th, Chairman Powell will testify before Congress
where the focus is expected to be on the Fed's handling of inflation and its monetary policy stance.
With January's CPI exceeding expectations, a rebound in core PCE, and strong service sector inflation, Powell is likely to emphasize the need to remain patient with rate cuts given the overall performance of the U.S. economy, signaling a hawkish stance.
However, there is increasing pressure from the U.S. government for rate cuts, which Powell will have to address. Sustaining high interest rates may tighten the financial environment in the long term, adding downward pressure on the economy and increasing the possibility of lagging effects from monetary policy.
Subsequently, the release of the February non-farm payroll report on March 8th will have a significant impact on market trends and further influence expectations of a rate cut by the Fed. If the employment numbers exceed the consensus expectation of 190,000, it could signal continued inflation and have a greater impact on market trends, affecting expectations for a rate cut by the Fed once again.
United States Unemployment Rate
Investment portfolio manager John Luke Tyner of Aptus Capital Advisors pointed out that inflation in the U.S. remains higher than the Fed's target and that the labor market needs further slowing down. He emphasized signs of recovery in employment and wage growth in the central region of the U.S., rather than focusing on news related to layoffs in the tech industry.
So far this year, the market has continuously postponed expectations for the start of a rate cut cycle by the Fed. It is anticipated that the Fed will maintain interest rates in March and May, with a close to 75% possibility of a rate cut in June. Current interest rate swap contracts indicate an expected decrease of only 75 basis points by 2024, aligning with the guidance of three rate cuts by 25 basis points each from the Fed.
Will there be another strong non-farm payroll report?
On Friday (March 8th), the U.S. Department of Labor will release the February non-farm payroll report. Analysts suggest that if February's non-farm data continues the strong trend from January, not only will the possibility of a rate cut in March disappear, but also discussions about whether to start a rate cut may cease altogether.
The January non-farm report showed a significant increase of 353,000 jobs, surpassing all analyst expectations. Additionally, the employment numbers from December 2023 were revised upwards from 216,000 to 333,000, indicating a robust labor market and postponing the timing of a rate cut by the Fed once again.
United States Non Farm Payrolls
After the release of non-farm data, market expectations for the timing of a rate cut by the Fed have been pushed back, as evidenced by betting against a rate cut in March
What will Powell's stance be?
The semi-annual monetary policy report of the Federal Reserve, released on March 1, stated that although the pressure facing the banking industry has eased, there are still some weaknesses in financial stability. In addition, officials reiterated the goal of returning inflation to 2% and emphasized the need to assess economic data and various risk factors before considering any interest rate cuts.
According to media reports, the Fed's handling of inflation became a focus of questioning by members of Congress in light of the unexpected rise in January CPI and the rebound in core PCE. However, considering that the new PCE price index shows continued inflationary pressure, it is expected that Powell will continue to signal his reluctance to cut interest rates.
Furthermore, on February 29, a community bank in New York once again went bankrupt, causing its stock price to plummet by over 25% and dragging down other regional banks. The company disclosed a series of negative news, including the resignation of CEO Thomas Cangemi, weak internal controls, and a tenfold increase in fourth-quarter losses to $2.7 billion, sparking concerns about a new crisis in US regional banks.
Therefore, Patrick McHenry, Chairman of the House Financial Services Committee, stated in a media interview that the hearing will also focus on the Fed's plan to increase capital requirements for large US banks.
Tyner stated that people believe Powell is currently unwilling to make any statements that could affect market or interest rate expectations.
$SPDR S&P 500 ETF Trust(SPY)$ $S&P 500(.SPX)$ $NASDAQ(.IXIC)$ $Invesco QQQ Trust-ETF(QQQ)$ $iShares 20+ Year Treasury Bond ETF(TLT)$
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
