Federal Reserve tone reduces expectation of interest rate cut in March
Market Snapshot
The fabled Santa rally continued into 2024, with markets performing well into the new year, and with the S&P 500 nudging towards 5,000 (which it has since surpassed!).
UK and US Central Bank update
Attention shifted to central bank meetings in the US and UK at the end of the January. As expected, the Bank of England and Federal Reserve did not make any changes, but it was an opportunity to hear the tone used and to determine the likelihood of an interest rate cut, possibly as soon as late March.
The Federal Reserve chairman, Jay Powell, took the first opportunity to set that tone. Data had been supportive of a continuation of economic growth momentum, alongside weakening inflation.
Although job openings increased slightly, suggesting the labour market was tight, fewer people had been quitting their jobs, suggesting diminished confidence amongst workers. That matters because wage growth tends to be faster amongst those switching jobs than those staying within the same job.
Labour market in the US shows positive signs
Following the central bank meeting more light was shed on the employment position with the monthly non-farm payroll report, which gets pulses raising across the investment world despite a tendency to be heavily revised in the following months.
The Bureau of Labor Statistics estimated that a huge 353,000 new jobs were taken in January, which was almost double the average forecasted figure, and well above even the highest of those forecasts. Not only that, but previous healthy jobs growth numbers were revised higher.
An important caveat here is that the headline jobs growth number comes from surveying companies and asking how many jobs they have filled. An alternative measure of the same thing surveys households and asks how many of them are in work.
This second measure sometimes conflicts with the first and did so again. But it is accepted that this household survey is not as reliable as the main non-farm payroll report, so this data suggests the labour market is strong.
Interest rate cut in March expectations reduced in the US
This clearly has implications on the Federal Reserve, and expectations for the speed of interest rate cuts. Fed Chair Powell disappointed investors saying he doesn’t believe that he will have sufficient confidence to cut rates in March. Pre-meeting, investors believed that there was a 60% chance of a rate cut, which moved to 40% after Powell spoke, and fell further to 20% after the jobs report.
Magnificent seven start to release their earnings reports
Turning to stocks, we are in the midst of the US Q4 earnings season with c. 40% of companies reporting their results by the end of January, with the predictable beats-to-misses ratio of 80%! While less than half of companies have reported, that understates the progression through this earnings season as Tesla, Apple, Alphabet, Microsoft, Amazon and Meta have all reported.
That just leaves Nvidia to complete the so-called ‘Magnificent Seven’ when it reports on 21 February. Of these big companies, Amazon and Meta dazzled, Microsoft was okay, Google and Apple slightly underwhelmed, and Tesla was received particularly badly by the market when the numbers landed. Any disgruntled investors may have felt relieved to know that a judge recently ruled that Musk’s extraordinary record-breaking $56billion compensation should be cancelled!
