Federal Reserve and labor market data

This week promises to be quite interesting. Investors' attention will be focused on the Fed's interest rate decision on Wednesday, and then the market will look forward to Friday's decision report from the American labor market.

The EUR/USD rate is currently in short-term consolidation between the levels of 1,0915 and 1,0820. Wall Street stock indices ended Friday's session with mixed results, with the Nasdaq Composite falling 0,4%. and the Dow Jones gained 0,2 percent. Inflation in the US continued to decline, as illustrated by the December PCE deflator.

Will Powell decide on more cuts?

All eyes are on Wednesday's meeting FOMC. Currently, Fed Funds Futures contracts assume that the American central bank will keep interest rates unchanged at 5,25-5,5%. In turn, the chance for the reduction in the cost of money in March is currently approximately 50%.. which I consider to be too optimistic a scenario priced by the market. Growth remains solid and the job market remains tight. According to the December projection and the latest dot chart published, US policymakers agree on three cuts this year. However, the market priced twice as many changes. The Fed will be interested in avoiding unnecessary increased market volatility and will want to create conditions that will enable the economy to continue to grow. Given the Fed's conservative nature, the risk is tilted toward Powell ultimately opting for more cuts than official forecasts and commentary indicate.

In the USA, economic growth slowed down in the fourth quarter, but the dynamics remained at 3,3%. exceeded estimates and certainly postpones the date of the first rate reduction. The result was worse than in the previous quarter (+4,9%), but still solid, suggesting that a "soft landing" of the American economy is becoming an increasingly likely scenario.

PCE inflation in line with consensus

Americans' spending increased by 0,7% in December. on a monthly basis. Forecasts were lower and indicated a dynamics of 0,4%. The Fed's preferred measure of PCE inflation was in line with consensus. On a month-to-month basis, we achieved an increase of 0,2%. (previously -0,1 percent) and year-on-year 2,6 percent. (previously 2,6%). The "core" indicator was respectively 0,2%. (previously 0,1%) and 2,9%. (previously 3,2 percent, forecast 3,0 percent). As a result of data in the first reaction, the dollar slightly appreciated. EUR / USD exchange rate dropped to 1,0855 and ended in similar areas. The reaction on the debt market was initially mixed. Ultimately, the yields of 2-year bonds ended the day at a higher level, around 4,35%.

The appetite for price cuts was slightly reduced after the data. While the underlying rate declined year-over-year, US consumer spending increased by more than expected, suggesting that consumer demand remains strong. Powell mentioned that he would like to see declines in this space before the cost of money is actually lowered. March as the starting date for easing monetary conditions in the US is, in my opinion, too early.

This week, we will receive the JOLTS and ADP reports from hard macro data - before the FOMC decision. The focus will then turn to monthly numbers from the US labor market. Here, the forecasts indicate a cooling, which is to be illustrated by an increase in the unemployment rate to 3,8%. and creation of approximately 170 thousand new jobs in the non-agricultural sector.

Source: Łukasz Zembik, OANDA TMS Brokers