Wall Street’s main indexes rose on Thursday, a day after the Federal Reserve left interest rates unchanged and hinted at a more dovish stance. The attention of investors now turns to an important job report that will be released on Friday and after this report, we could have a clearer outlook on the labor market and the interest rate path.
According to the CME FedWatch tool, money markets currently estimate a 59% probability of a rate cut of at least 25 basis points happening in September, with a 70.8% likelihood of a rate cut in November.
The main reason why we will not see lower interest rates earlier is the fact that Federal Reserve Chair Jerome Powell said that recent inflation data had not given policymakers enough confidence to ease monetary policy soon, noting that the U.S. central bank may need to keep interest rates higher for longer than previously thought. Naomi Fink, global strategist at Nikko Asset Management, said:
“Inflation remains higher than desired in the United States, the Fed remains in wait-and-see mode and not ruling out (rate) cuts altogether. Meanwhile, the number of Americans filing new claims for unemployment benefits held steady at a low-level last week, pointing to a still fairly tight labor market.”
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April Employment Report
Despite muted jobless claims it is also important to mention that data released on this Thursday showed a drop in planned layoffs, a surge in quarterly labor costs, and a sharp deceleration in productivity, all of which throws focus on Friday’s much anticipated April employment report.
Positive information is that the Organization for Economic Cooperation and Development (OECD) raised its global growth forecast, partially due to the resilience of the U.S. economy. First-quarter earnings season is almost complete, with 373 S&P 500 companies having reported their results and according to LSEG data, 77% of those companies have exceeded expectations.
Investors are currently trying to balance this two-sided narrative: the U.S. economic situation, which still remains resilient, and at the same time the inflation picture, and interest rates, which will eventually be problematic for the stock market.
