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MARKETS

On Thursday, Wall Street raced ahead, with the S&P 500 climbing 1% to achieve a new record-high milestone. Meanwhile, the Nasdaq composite outperformed, closing up 1.5% as technology and growth stocks continued revving on all cylinders. Investor optimism about the possibility of Federal Reserve rate cuts later this year provided jet fuel to the rally.

In Washington, Federal Reserve Chair Jerome Powell’s recent statement regarding rate cuts "can and will" begin in 2024 underlined a clear commitment contingent on the expected trajectory of the US macroeconomic landscape. This assertion was remarkably unequivocal, especially at a time when some market participants were contemplating the possibility of a higher terminal rate, suggesting that the next move from the Fed might be a hike.

Powell's remarks also highlighted the Committee's awareness of the risks associated with delaying rate cuts for too long, perhaps giving a hat tip to the soaring house prices, which are a by-product of few resales on the market as no one wants to give up their cheap mortgages.

Clearly, his remarks boosted investor optimism, lifting equity indexes to fresh milestones that had wavered in the days leading up to his Congressional testimonies. Powell's appearances began on Wednesday with a session before the US House Financial Services Committee.

Importantly, Thursday also brought positive macro news for those anticipating dovish signals from the US economy, as continuing claims surpassed estimates and unit labour costs were revised downward.

Historically, this update seldom qualifies as "top-tier" by any measure, especially considering it arrived just 24 hours before a major US jobs report. Nonetheless, the data did help alleviate concerns about a "hard landing" scenario, particularly after Chair Powell dispelled growing speculation about a more hawkish policy trajectory from the Fed. This melding was music to investor’s ears.

How much early action is being taken in anticipation of Friday's job numbers remains unclear. The upcoming February Non-Farm Payrolls (NFP) report is expected to show a correction lower from the robust gains observed in January and December. Market consensus suggests around 200,000 jobs added. Notably, any figure lower than this, and dare I say, could persuasively drive the short end of the US yield curve even lower to the benefit of global risk assets. However, any print indicating a return towards a normal pace of job gains will be positively embraced.

As market participants engage in customary inter-market discussions ahead of the eagerly anticipated Non-Farm Payrolls (NFP) report, attention has been drawn to various alternative indicators such as the household survey jobs series, aggregate weekly hours, and the ISM employment index (below). These alternative metrics suggest a potentially” weaker employment scenario. However, it remains unclear whether any of this has further fueled "animal spirits" and price action has considered these alternative perspectives.

Frustrated observers searching for signs of an impending recession have often looked to the continuing claims data series for evidence to support their arguments. This week, their case seems to have gained some strength. Moreover, with the "no landing" narrative gaining traction again, we might approach a scenario where the markets positively interpret negative economic news again.

Certainly, the data leading up to the payroll report leaned towards the dovish side even before Thursday's continuing claims report. The ISM manufacturing index missed expectations, while the ISM services prices gauge retreated more than anticipated. Additionally, the quit rate in the JOLTS release dropped to its lowest level since August 2020 despite a persistent headline figure for job openings. Moreover, the ADP report came in slightly below consensus.

Mixing together all these factors, the dollar index slid to its lowest point since late January, and 10-year US yields experienced their most significant two-day rally in over a month. And that in itself is typically a delectable recipe for risk.

The evolving narrative underscores the dynamic nature of market sentiment. While Fed officials are understandably focused on January's inflation overshoots and the overall resilience of the economy, the current ebb and flow of data appears to be tilting back in a dovish direction.

This poses a considerable challenge for Fed critics and market bears who have been grappling with losses since late October. The fact that the S&P equal-weighted index reached a record on Thursday adds rubs salt in the wounds for skeptics, demolishing one of the last remaining footings of the bear case, which asserted that only maga cap-weighted benchmarks were outperforming.

Interpret the data and all of these comments as you see fit, bearing in mind that the macro narrative typically hinges on the Non-Farm Payrolls report, especially as we transition out of the first full week of the month and into the second. This pivotal report often sets the tone for market sentiment and economic expectations moving forward.

ASIA MARKETS

Friday's trading session in Asia appears poised to witness a clash between global market strength and local caution, with particular focus on the two regional giants, China and Japan.

In China, market participants are still grappling with the uncertainty surrounding the extent of government stimulus following the recent unveiling of annual government plans earlier this week.

The robust performance in overseas shipments may provide some semblance of relief amid persistently subdued domestic demand. However, China cannot depend solely on international markets to purchase inexpensive goods to salvage its economy. In anticipation of the National People's Congress (NPC), there were hopes among market participants for substantial fiscal stimulus from China. However, the Party's approach appears to be characterized by promises, rhetoric, and incremental measures rather than comprehensive fiscal interventions.

It's becoming increasingly evident that Xi Jinping's administration faces considerable challenges in charting the next steps for China's economic trajectory. This uncertainty is palpable to domestic markets, overseas investors( who have all the US dollar to go), and geopolitical adversaries, who closely monitor Beijing's policy directions amid shifting global dynamics.

In addition, the recent news cycle surrounding China has not been conducive to bullish sentiment in asset prices.

S&P Global issued a cautionary note indicating that China's credit rating might face a downgrade if its economic recovery remains feeble or heavily relies on extensive stimulus measures. S&P's last downgrade of China occurred in 2017, but Moody's, a competing agency, placed Beijing on a downgrade alert in December.

Beijing finds itself embroiled in a multifaceted struggle against deflation, a potential crash in the property sector, and decelerating growth. The financial resources required to address these challenges and the task of bailing out indebted local governments are exceptionally high.

In terms of trade dynamics, three U.S. Senate Democrats representing auto manufacturing states recently urged the Biden administration to raise import tariffs on Chinese electric vehicles. This move underscores the ongoing efforts by lawmakers to shield the U.S. auto sector from external competition.

As pressure mounts on the White House to take decisive action against Chinese vehicle imports, the U.S. House Energy and Commerce Committee has greenlit legislation aimed at compelling China's ByteDance to divest from the short video app TikTok within six months. Failure to comply could result in a ban on TikTok in the United States.

Meanwhile, the Nikkei slumped 1% in Japan as the yen recorded its most significant rise of the year amid growing speculation that the Bank of Japan could terminate negative interest rates as early as this month.

FOREX MARKETS

Speculation regarding when the Bank of Japan might abandon its negative interest rate policy has been fluctuating, with sentiment recently shifting in favour of a potential move as early as this month. This speculation caused the yen to surge, reaching its highest level in a month and marking its most significant one-day gain of the year.

With regards to the ECB decision, Christine Lagarde emphasized that the European Central Bank (ECB) "needs more evidence" before considering rate cuts but reiterated the likelihood of easing the level of restriction once the Governing Council reviews forthcoming data on pay growth, signalling a potential move in June. While rate cuts were not discussed at the current meeting, Lagarde stated that discussions regarding dialling back the restrictive stance have commenced. The decision will likely be informed by new staff projections indicating lower inflation and slower growth. Lagarde indicated that more clarity will emerge in June.

The message conveyed was unmistakable: Unless there's a definitive deterioration in the inflation outlook, the ECB is poised to implement rate cuts in June, while the Fed is likely to follow suit, provided that the price overshoots seen in January's CPI/PCE figures were an aberration rather than the onset of a feared second wave of inflation.

OIL MARKETS

It’s been another rangy and choppy week in oil markets as traders conitue to play offsetting hands. On the one, weaker US data suggests lower oil prices may be warranted. On the other hand, market participants balanced weaker-than-expected U.S. economic data against dovish comments from the Fed's Chairman Jerome Powell, driving the US dollar lower against oil importers, which is typically viewed as a favourable signal.

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