US stock indices were drifting lower in early trade today, adding to losses from yesterday. They took another lurch lower following the release of the latest Non-Farm Payroll update.
December payrolls came in at 216,000 well above the 170,000 consensus expectation. In addition, Average Hourly Earnings also came in above forecast. This raised concerns that the Federal Reserve would push back against the current market predictions that the central bank would cut rates by 150 basis points this year, starting in March. This time last week the S&P 500 came within a few points of 4,800. Earlier today it got down to 4,663 and on course to post its fifth successive negative session.
A pull-back was overdue given the speed and size of the rally since the end of October. Traders have woken up to the realisation that they may be getting ahead of themselves in pricing in aggressive rate cuts from the Federal Reserve this year. At its last monetary policy meeting in mid-December, the Fed’s FOMC was certainly more dovish than it had been in September. But it was still only forecasting 75 basis points-worth of easing in 2024. On top of this, the minutes of that meeting, which were released on Wednesday, showed that there was considerable uncertainty over the timing of rate cuts. Before today’s payroll data the CME’s FedWatch Tool, which measures where the real money is going, put a 63% probability of the first 25 basis point cut happening at the March meeting, down from 73% last week. After the release, the swaps market has the odds of a 25 basis point March cut at evens.
The S&P recovered lost ground and traded back into positive territory. But the rally had faded by the European close, and the prospect of yet another negative close is finely balanced.
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