Wall Street was taken aback by the US labor market's resilience in January. Another unexpectedly hot report could shake things up again.
The January jobs report showed that the US economy added a stunning 353,000 jobs that month and the unemployment rate stayed at 3.7%. That all but cemented investors' belief that the Federal Reserve won't cut interest rates at its March policy meeting, and, coupled with hot inflation data, raised doubts about whether the Fed would cut rates at all this year.
Those fears waned after Federal Reserve Chair Jerome Powell indicated in his congressional testimony this week that he's not taking rate cuts off the table. Investors cheered Powell's signal, helping push the S&P 500 index to close at a record high Thursday.
"We believe that our policy rate is likely at its peak for this tightening cycle," Powell said on Wednesday. "If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year."
Still, the central bank hasn't made it clear when it will begin paring back rates, keeping investors on edge ahead of key data releases. Economists expect that the US economy added 200,000 jobs last month, according to FactSet estimates. While far below January's searing tally, that estimate would be a continuation of a historically strong labor market that's stayed resilient against interest rates at a 23-year high.
Traders largely expect the Fed will begin cutting rates in June or July, according to the CME FedWatch Tool. But those expectations could shift again depending on how the latest labor data looks, some investors say.
"There's no wiggle room for investors — even a slight upside surprise to job creation might rekindle fears about interest rates needing to be 'higher for longer,'" wrote BeiChen Lin, investment strategist at Russell Investments, in a Monday note.
It's not just jobs data on Wall Street's radar. The January Consumer Price Index is due next Tuesday, and investors will watch closely, especially after price hikes eased less than expected in January.
"I would like to see inflation move down, a couple more data points, so we can be confident on that sustainable path to 2%," Cleveland Federal Reserve President Loretta Mester said Thursday on CNBC, adding that she believes more moderation in areas like employment growth could put the Fed in a position to cut rates later this year.
Some economists are looking even further ahead to the Fed's Summary of Economic Projections, slated for release at its March policy meeting. More specifically, investors are looking to the Fed's dot plot, which charts the interest rate expectations over the next few years from each member of the Federal Open Market Committee.
Central bank officials in December penciled in three quarter-point rate cuts for 2024 in their dot plot, which is released every other month.
"Dots that point to one or two cuts rather than the three the market is anticipating may surprise folks, with incoming data likely to move the needle following hot January [labor] data," wrote José Torres, senior economist at Interactive Brokers, in a note on Wednesday.
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