The Only Economic Event That Matters This Week

The U.S. equity markets posted a stellar performance last week on the back of the optimism that the Fed will keep its monetary policy on autopilot—that the Fed will increase the interest rate by 50 basis points in each meeting for the next couple of their meetings. However, the Fed’s monetary policy decision and the U.S. stock market’s performance are very much tied to two critical factors, and one of them will be released this Friday.

The U.S. equity markets are still down significantly year-to-date (YTD): The S&P 500 index is down by 13%, the Dow Jones 9.22%, and the Nasdaq 23%. Even so, this represents an improvement compared to two weeks ago, as it was only last week that we saw bargain hunters stepping in to stop the bleed. The sell-off was mainly due to fear of stagflation as inflation continues to soar and economic activity continues to decline. In addition to this, the Fed has adopted the most hawkish monetary policy in decades, and believes that the U.S. economy can withstand higher interest rates.

There is no doubt that market players have been addicted to loose monetary policy, and when that was inevitably going to change, we would have seen a lot of turmoil in the market. However, with inflation at a multi-decade high along with the Fed’s most hawkish policy, traders are worried that the U.S. economy could see a more severe drop, and the stock market could plunge along with it.

However, the Fed has assured the market players that they are keeping close tabs on the data, and their monetary policy is dependent on the strength and weakness of the U.S. economic numbers. One number that stands taller than any other is the U.S. Non Farms Payroll (NFP) number, which will be released on Friday. The forecast for the upcoming headline number is 325K, while the previous reading was 428K. If we see a similar trend again, this will boost the Fed’s confidence in their monetary policy, and we are likely to see the Fed remain on autopilot for the next few months and that should push the stock market higher.

Since January, there has been only one month that saw the U.S. unemployment rate missing the forecast and disappointing traders. For Friday's numbers, traders are expecting the unemployment rate to fall to 3.5%, while the previous reading was at 3.6%. If the number falls in line with the expectations, there will be less pressure on the Fed to defend its current monetary policy. Such an event could have a positive influence on the U.S. stock market.

One thing worth paying close attention to will be the average hourly number, which came in at 0.4% last month against the reading of 0.3%. Further improvement in the average hourly number shows the strength of the U.S. labor market and is a positive sign for the stock market. So far, traders expect a continuation of this trend.

Any small surprise in the economic reading is likely to trigger a gradual move to the upside, but if the reading shows a significant movement away from estimates, we could see equity markets rolling over and erasing the gains they scored last week. A strong economic number could also push the markets lower, because traders will likely begin to anticipate a more hawkish stance from the Fed in terms of more aggressive interest rate hikes.

The upcoming U.S. NFP data could very well be the most important event this week that could make or break the stock market rally. As long as the reading is close to the estimate and barring other data or market events, we should see a continuation of the upward trend that started last week.