Why March Rate Cut Expectations Have Been Crushed

Traders have been somewhat pessimistic since Federal Reserve Chairman Jerome Powell poured cold water on rate-cut expectations, which many were hoping would take place as early as March. These expectations weren’t built by so-called dump money, which is associated mainly with retail investors; in fact, the smartest Wall Street giants such as Goldman Sachs had their eyes on March as a potential month for the first rate cut after a long period of rate hikes. However, as the dust has settled from the Fed meeting, traders are sitting and thinking about what could trigger the Fed for the March meeting to still remain a live meeting, meaning that a possible rate cut could still happen, while others think that the possibility of a rate cut during the month of May may go away.

Background

This week, Powell said that the Fed was not prepared to declare victory in the fight against inflation. Powell clearly said in his statement that the rate cut in the March meeting is not up for discussion as inflation continues to remain a threat and there are possible scenarios where inflation continues to remain well above the Fed target of 2% for a long period of time. By saying that, he was clear in sending the message that something has to move if the Fed is going to declare a victory in their war on inflation, and that either they will have to reset their expectation target of inflation of 2% or something else needs to change dramatically in order for inflation to kiss the Fed’s target. For now, it is clear that inflation is going to remain well above the Fed’s target.

As for the market players, the Fed’s decision was a real big slap in terms of their expectations. This is because markets expected a more dovish stance from the Fed, and from the Fed’s commentary in December, the takeaway they had was that the Fed was ready to cut and slash interest rates. In the December meeting, the Fed’s stance was overly dovish, but market players took that out of context and started to plan their trading journeys based on the assumption that a rate cut will take place in March and everything else is nothing but noise. This is for market players who believed this narrative was true, but the Fed gave them a reality check this week.

Why the US NFP is Important for Early Rate Cuts

Today we got the US NFP data, a number closely watched by the Fed in order for them to measure the health of the US economy. The US labor market over the last number of months and quarters has been showing decent growth even amid headlines indicating significant job cuts in certain industries.

But today's numbers are jaw-dropping. The US NFP data confirmed that the US labor market is firing on all cylinders, as the number was a blowout, coming in at 335K, against expectations of 185K. The US unemployment rate fell to 3.7%, against the forecast of 3.8%. These numbers for the Fed are music to their ears, as they show that the job market is strong. But the devil is always in the details, and that is your wage growth number, which came in much stronger as the average hourly earnings m/m came in at 0.6% against the forecast of 0.3%.

The number has told us clearly now that the March interest rate cut is off the table. If anything, higher hourly earnings may put more risk on the US inflation rate, which means that we may not see as much stability in the inflation rate as many were expecting. This means that there are chances that the conversation about a rate cut in the month of May may also go away.

The below chart shows that bulls are really struggling now to push the price higher as the price seems to have formed a bearish pattern which means that we may the index falling towards its support level shown on the chart below. A modest sell off would push the markets towards the first support zone shown in light green and a deep sell off may push the price towards the green line where there could be bigger buy orders to push the markets back up.

US 30 Chart By XTB

So for now, traders will readjust their expectations, and they will be looking at the month of May as a possibility for an interest rate cut. As for the markets, after the dust is settled from the US NFP, markets will continue to trade on earnings, which continues to show that the tech sector is still very much on fire.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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