Jobs report strengthens conviction of a June rate cut by the Fed

Chairman Powell along with other Fed officials has been conveying a unified narrative, that inflation is “not far” from where it needs to be for the central bank to pivot from a restrictive policy to its first rate cut. Today’s jobs report reinforces and strengthens the likelihood of the first rate cut by the Federal Reserve by June of this year. 

According to the US Bureau of Labor Statistics, “Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate increased to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.”

Powell’s testimony this week expressed that the Fed is pleased with recent inflationary data, but simply wants more data confirming that it is on a sustained path to 2% before it has the confidence to initiate its first rate cut later this year. The data revealed in today’s jobs report was precisely what the Federal Reserve had hoped to see, the economy continues to slow down but at a pace that makes a “soft landing” probable. 

According to the CME’s FedWatch tool, the probability that the Federal Reserve will maintain its current interest rate in March is 97%, and 70.5% in May. However, the probability of the first rate cut in June is exceedingly high, currently at 71.5%.

Today’s report continues to fuel US equities to new record highs. The Standard & Poor’s 500 had the highest close in history. U.S. Treasury yields moved lower, taking the yield on the benchmark 10-year note to 4.07%.

Gold also gained substantial ground. As of 5:35 PM ET gold futures basis the most active April contract is currently fixed at $2,186.20 after factoring in a net gain today of $18.80 (0.87%) taking the precious yellow metal to its highest value on record. Gains in gold were fractionally aided by continued dollar weakness. The dollar traded to a low of 102.30 and is currently fixed at 102.69 after factoring in today’s fractional decline of 0.08%.

Traders will now wait for next week’s release of the most recent inflationary data vis-à-vis the CPI (Consumer Price Index) which will be released on Tuesday, March 12. However, early forecasts are anticipating that the February CPI report could reveal that inflation is rising faster than anticipated as a direct result of a spike in energy costs.

According to MorningStar, “The Consumer Price Index report for February 2023 is expected to show inflation heating up again, thanks to an uptick in gasoline prices. But even excluding higher costs at the pump, the report is expected to show that upward pressure on prices is remaining stickier than Federal Reserve officials may want.”

The report also suggests that “Economists expect the overall CPI reading in February to show 0.4% growth on a monthly basis, up from 0.3% growth in January, with the annual growth rate holding steady at 3.1%, according to FactSet’s consensus estimates.”

Wishing you as always good trading,