US payrolls and the Bank of Japan in the spotlight over the next two days

European markets ended the day slightly higher yesterday after the chairman Federal Reserve Jerome Powell clarified his comments from the previous day regarding what the Fed is likely to do on rates in two weeks time.

Powell merely reiterated that the Federal Reserve remains data dependent and that nothing has been decided as to whether we will see a 25 or 50 bp rate hike.

These comments helped briefly push yields down and take the dollar off its daily highs, but in reality, markets are slowly starting to realize that rates are likely to stay higher for longer, and the final rate is likely to be much higher than previously thought.

Indices still with a chance to increase

Despite this, the US markets, although they closed lower, managed to maintain key levels. The S&P500 and Nasdaq 100 continue to trade above key technical supports on the 200-day SMA. The yield on 2-year US bonds has increased by more than 100 basis points since the last Fed meeting, reaching a level above 5%. On the other hand, at the long end of the curve, not much has been happening for two weeks. This may mean that investors buy longer duration at the expense of stocks or shorter duration, hoping that sooner or later the Fed will have to capitulate. Additionally, at the long end of the curve the sensitivity to further hikes decreases and increases to potential cuts.

That puts tomorrow's February payrolls in the spotlight as to where the US equity markets might head. It is worth noting that the NFP broke the consensus 10 times in a row, which had not happened before.

yesterday's ADP report for February turned out to be better than expected (242), wage growth amounted to 7,2%, which is still well above core inflation, while in January we saw only a modest decrease in the number of vacancies in JOLTS to 10,84 million, which strengthens the tightness in the labor market.

These data do not indicate an economy in which inflationary pressures can be expected to ease soon, which the markets do not seem to take into account at the moment. It is hard to imagine that the Fed might even consider approaching its 2% inflation target much sooner than 2025, given the challenges facing the global economy.

Traders eyes on the BoJ

Looking ahead to the next few days, there are two events that could have a big impact on how much volatility we will see over the next few sessions.

The first is the Bank of Japan interest rate decision, a meeting that will be a farewell Haruhiko Kuroda as the spokesperson for Japan's monetary policy, to be replaced by Kazuo Ueda as the new governor of the Bank of Japan.

Many of the comments about Ueda point to his rather neutral stance when it comes to the prospect of possible changes in policy. This suggests that the current yield curve control (YCC) policy is unlikely to change in the short term. However, given that this will be Kuroda's final meeting as central bank governor, there is a possibility that he will start laying the groundwork for a policy change in the coming months.

Japanese inflation is already well above target at 4,3% and looks set to rise further. It's hard to imagine a scenario where Bank of Japan he would be happy with soaring inflation and a currency that is once again weakening under the pressure of a strong US dollar.

On Friday, the main topic will be the February payrolls report after an astonishingly strong reading of 517. a month ago. As previously mentioned, the market reaction has been most notable in terms of bond yields, and while equity markets have continued to hold on to the narrative that further rate hikes are likely to be limited, the strength of the economic data has since shifted this perception quite markedly in recent weeks.

In the course of a month, we went from a narrative of rate cuts before the end of the year, to an imminent pause over the next few months, to how many hikes can we expect now?

Friday's NFP data will be crucial

tomorrow payroll report it may further reinforce the latter thesis if employment growth, which we saw in January, is not significantly lowered, and in February there will be another strong report from the labor market.

To be clear, no one is expecting another 517. and we may witness a significant revision, but the February figure of around 220 would continue to be consistent with a strong US labor market, especially with unemployment at 3,4% and the lowest level since 1969.

Moreover, the rising labor force participation rate we saw in January suggests that we are seeing people return to the workforce. The increase to 62,4% corresponds to the highest level since the start of the pandemic.