After the strong non farm payroll report almost exceeded the expectations of all analysts, the expectation of the Federal Reserve's first decline in June was hit again.
On April 5th local time, data released by the US Department of Labor showed that the number of non farm payroll workers in the US increased by 303000 in March, far exceeding economists' predictions of 200000 and also higher than February's 270000, marking the largest increase since May last year.
Surprisingly, after a brief decline, the US stock market unexpectedly rose. As of the close of the 5th, the Dow Jones Industrial Average rose 0.80% to 38904.04 points; The Nasdaq was 1.24% at 16248.52 points; The S&P 500 index rose 1.11% to close at 5204.34 points.
The reason for this is that investors are currently more concerned about the boosting effect of the economic fundamentals on the US stock market, and the impact of interest rate expectations has been significantly weakened. Chris Zaccarelli, Chief Investment Officer of the Independent Advisory Alliance, believes that for investors, consumer spending and corporate profits are more important than how long and how many times the Federal Reserve cuts interest rates. In other words, if the economy and corporate fundamentals are good, then four, three, or two interest rate cuts in 2024 would be equally beneficial for the US stock market.
The expectation of the Federal Reserve's interest rate cut is being suppressed again
Behind the unexpected increase in non-agricultural employment, the medical industry ranked first with a growth rate of 72000 people, followed by the government with 71000 people, the leisure and hotel industry with 49000 people, and the construction industry with 39000 people. In addition, the retail industry contributed 18000 new jobs, and the "other services" category added 16000 new jobs.
Meanwhile, the US unemployment rate slightly decreased to 3.8% in March, in line with expectations. The unemployment rate has remained below 4% for 26 consecutive months, setting a record for the longest time since the late 1960s. Key US hourly wages in March increased by 0.3% month on month and 4.1% year-on-year, both in line with Wall Street's expectations.
In response, Seema Shah, Chief Global Strategist at Xinan Asset Management, stated that the average hourly wage data meets expectations, and as Powell recently stated, a strong labor market is not a concern if price pressures ease. The non farm report should reassure the market that if the Federal Reserve does not cut interest rates in June, it is because the economy remains strong.
After the release of the non-farm report, the Chicago Mercantile Exchange's Federal Reserve observation tool showed that the probability of the Federal Reserve cutting interest rates for the first time in June this year has dropped to around 50%. The market will fully price the timing of the Federal Reserve's first rate cut from July to September, and the probability of the Federal Reserve cutting interest rates twice in 2024 has risen to about 50%.
In addition to recent stronger than expected economic data, the rise of crude oil, the mother of commodities, is also weighing on the Federal Reserve's expectation of interest rate cuts. Under the combined influence of the turbulent situation in the Middle East and consumer demand, international crude oil prices have reached a new high for several months. Brent crude oil futures prices have climbed nearly 20% so far this year, surpassing $90 per barrel for the first time since October last year. This has also affected gasoline prices, with the national average gasoline price estimated by the American Automobile Association (AAA) rising by about 15% so far this year, reaching $3.582 per gallon on April 5th, laying the groundwork for a possible surge in US gasoline prices this summer.
Will interest rates not be lowered or even raised?
With the aggressive expectation of interest rate cuts at the beginning of this year gradually declining, the voice of the Federal Reserve not cutting or even raising interest rates this year has also begun to emerge.
Apollo Global Management analyst Torsten Slok directly stated that the Federal Reserve may not cut interest rates this year, as the US job market is strong and financial conditions are relatively relaxed. The stock market value has risen by over $10 trillion in the past five months. The issuance of investment grade bonds and high-yield bonds in January, February, and March rebounded significantly. IPO activities are returning, and M&A activities are also returning. These factors will support growth in consumer spending, capital expenditure, and recruitment in the coming quarters.
On an official level, Federal Reserve Director Bauman pointed out that it is not yet the time to lower interest rates, and inflation faces many potential upward risks. Therefore, policymakers need to act carefully and not relax policies too quickly. Lowering policy interest rates too early or too quickly may lead to a rebound in inflation, and over time, further interest rate hikes will be needed to restore inflation to 2%. Bauman even stated that if inflation stagnates or even reverses, the Federal Reserve is still willing to further raise interest rates.
Correspondingly, Dallas Fed Chairman Logan stated that due to recent high inflation data and signs that borrowing costs may not be as significant a drag on the economy as previously thought, it is still too early to consider lowering interest rates. She is concerned that monetary policy may not drag down the economy as most forecasts suggest, which could mean higher neutral interest rates.
As one of the few economists who accurately predicted that inflation would spiral out of control, former US Treasury Secretary Summers emphasized that the surge in non farm employment in March indicates that the Federal Reserve's estimate of neutral interest rates is very inaccurate and should not take interest rate cuts in June. He pointed out that the strong employment report indicates that the US economy is accelerating again, and considering the "epic" easing of financial conditions and other factors, neutral interest rates are far higher than what the Federal Reserve considers.
I think the correct approach is to keep interest rates unchanged, which is much longer than the time shown in the grid chart. Although the direction of the next interest rate adjustment is likely to be downward and should also be downward, the possibility of interest rate hikes also exists. Summers warned.
Overall, although the sound of the Federal Reserve not cutting or even raising interest rates this year has emerged, this is still a small probability event, and the next step of the Federal Reserve's action is likely to be a rate cut. However, strong economic data has dispelled the urgency of interest rate cuts, and this year's "big year of interest rate cuts" is unlikely to occur, and investors are more likely to usher in a mild year of interest rate cuts.