Wall Street will weigh the interest rate outlook at a moment when the bulls have taken charge of the market, with a risk-on enthusiasm starting to draw parallels to 2021. For example, in February, the Dow Jones Industrial Average closed out its first four-month advance since May of 2021.

However, you need to watch these two key events this week for anything significant to the market direction.

Fed’s Powell speech

Fed Chair Jerome Powell is set to give his semi-annual monetary policy update to the House of Representatives on Wednesday, and the Senate on Thursday, testimonies that will be dissected by traders for any insight into when lower rates are coming.

Rate cut expectations have already come down from where they were as the year began. Now they’re expected to start later in the year and traders forecast fewer of them. At the January Fed policy meeting, Powell shot down the probability that rates would come down in March, insisting that the Fed will proceed carefully.

Currently, markets are pricing in the likelihood of a quarter percentage point first cut coming in June, instead of March or May, as implied by trading interest rate futures, according to the CME FedWatch Tool.

Fed chief is largely anticipated to stick to the same talking points in testifying before Congress. But his comments will take on added significance after last month’s hotter consumer and producer price reports reminded investors that the last mile to the Fed’s 2% inflation target won’t be smooth. Powell will likely try to address and assuage those concerns.

The emphasis has shifted back to inflation. Any remarks made by Powell that are at variance with what he has previously said, have the potential to be a market-moving event. On the calendar, the Capitol Hill appearances come ahead of the February jobs report next Friday, and are also the last scheduled appearances by the Fed chair before the next Fed meeting on March 19-20. 

Jobs data

Many investors are hopeful that an expected softening in the labour market will signal to policymakers that they can cut rates sooner rather than later. The February jobs report, due next Friday, is expected to show a moderation in payroll gains.

The US economy is anticipated to have added 225,000 jobs in February, down from a rise of 353,000 the prior month, according to FactSet consensus estimates. The unemployment rate is expected to have held steady at 3.7%. Hourly earnings are anticipated to have grown by 0.25% last month, down from a 0.6% jump in the prior month, according to economists polled by FactSet.

There have been other recent signs of cooling in the labour market. While companies are still retaining workers, data from the Labor Department this week showed that initial jobless claims ticked up from the prior week, as did continuing claims for unemployment benefits.

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Fullerton Markets Research Team
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