This month’s release of the all-important NFP figures will be a bit unusual. Most global markets will be closed on Friday, when the data is released, so there won’t be a knee-jerk reaction to the figures. Traders will have all weekend to process the information, and it will have to be interpreted in the context of any market-moving events from the Middle East in the meantime.
Last month also saw the market look past the US jobs data, as developments in the war with Iran almost completely overshadowed it. But that means the market’s reaction could be more acute, as it reacts to two months’ worth of key information that is a major concern for the Fed. Recently, the high price of fuel has shifted the focus to the potential impact of inflation. But if the war ends soon enough, the focus could snap right back to the jobs market, generating a major shift in Fed expectations.
The Fed Odds Are Already Shifting
The main theme in the markets this week has been optimism about the situation in the Middle East. US yields have declined, which has been positive for gold but negative for the US dollar. The effects have been broad-based, with the Euro and Pound gaining, and even commodity currencies getting support.
As recently as last Friday, the market saw a 70% chance that the Fed would keep rates unchanged through the rest of the year. Around 20% were even betting on a rate hike. Now, the situation has shifted, with the same 70% expecting policy to remain steady. But now the odds of a hike have virtually vanished, and the chances of a rate cut are rising. This means the market is coming back to agree with the Fed, which forecast one rate cut this year after its March meeting.
Why Are Traders Less Worried About Inflation?
Analysts are pointing to two eventualities that have led markets to expect more easing from the Fed. The first could be considered the best-case scenario, where the war ends quickly, and oil prices drop. This means the impact of inflation will be short-lived, and the Fed can largely look past it and focus on the state of the economy.
The other scenario is if the situation significantly escalates, and crude prices go even higher. Economists warn that this could mean that business activity slows, and the economy tips into recession. In that scenario, inflation would also be temporary, as higher prices lead to demand destruction, which then forces prices down. This would prompt the Fed to cut even more aggressively. What would keep inflation higher and keep the Fed from cutting is an in-between situation where the Strait of Hormuz remains highly restricted for an extended period, but not enough to tip the global economy into a recession.
The Focus Turns to the Jobs Numbers
As attention returns to the US economic situation, traders are growing concerned about the job market. Vacancies and hiring dipped in March amid the uncertainty, which could mean the upcoming NFP figures disappoint once again.
The consensus among analysts is that the large negative number for February was an outlier, and that March NFP will return to 50K from -92K previously. The unemployment rate is also expected to drop to 4.4% from 4.5%. That could keep the market expecting the Fed to hold for the time being. But if the market is once again surprised by a negative number, then it could go back to pricing in a rate cut, which would weigh on the dollar and boost gold.
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