• Fed’s Delayed Rate Cuts: Strong economic indicators prompt caution
• Labor Market Strength: Supports case for postponing rate cuts

The Federal Reserve’s decision to postpone its March rate cuts, driven by stronger ISM numbers, spiking price indices, and robust payroll growth, marks a significant shift in market dynamics.

In response to a week filled with the Fed Meeting, Big Tech Earning reports, and employment reports, the S&P 500 recorded a modest pullback after reaching a record high, indicating a cautious market sentiment.

Mr. Chair Powell, in his appearance on CBS 60 Minutes, maintained a hawkish tone, suggesting that a March rate cut might be premature. He advocated for patience, stating, “The prudent thing to do is just to give it some time and see that the data continue to confirm that inflation is moving down to 2% in a sustainable way.”

Jerome Powell essentially emphasized policymakers’ preference to wait for additional confirmation of falling inflation before beginning the rate cut cycle, a message that seems to have been successful in pushing back the market’s expectations.

This message was soon backed up by Stronger-than-expected economic data that pushed back expectations of a rate cut in March.

Hot ISM services PMI data lifted bond yields to year-to-date highs. Bond selling sends the 10-year treasury rate from 3.82% to 4.15%^[1].

All that caused the probability of a rate cut in March to come crashing down from 64.0% a month ago to just 16.5%^[2].

Source: cmegroup.com

The strength of the job market should bolster confidence that the economy is robust enough that maintaining interest rates at their current level does not risk significantly undermining GDP growth. Additionally, a key highlight from the January payroll data was the increase in wage growth to 4.5%^[3]. This boost in wages is beneficial for consumer spending, though it may not align with the narrative of decreasing inflation.

While it is cautious to overemphasize a single report, especially when it diverges from other recent data, such as last week’s unit labour cost numbers, which indicated a significant easing in wage pressures, the combination of solid job growth and stable wage increases makes a compelling argument for the Federal Reserve to delay any rate cuts.

The continued strength in the labour market and a Fed that will be easing off the break, will be the key tailwinds, while ongoing geopolitical tensions and stretch market valuations are likely to be the headwinds for the market bulls.

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1. Tradingview.com
2. https://www.cmegroup.com
3. Forbes.com