With markets in a trading range, clarity on interest rates is needed to make progress. The recent jobs report is encouraging.
- There had been some encouraging signs on inflation since the start of the year and the banking turmoil is likely to tighten credit conditions
- However, jobs dated remained a headache for central banks, with tight labour markets across the world
- The latest US jobs report suggests the tide might finally be turning
Markets are in a holding pattern, flip-flopping with every shift in interest rate expectations. It is increasingly clear that until there is greater clarity on the outlook for interest rates, this pattern is unlikely to change. The latest jobs report may bring this one step closer.
There had been some encouraging signs on inflation since the start of the year. Commodity prices had started to drop, particularly natural gas and wheat. US manufacturing activity dropped to its lowest level in nearly three years and companies reported lower input prices. US inflation prints showed weakness, even if data from the UK and Europe gave policymakers pause for thought.
The banking turmoil appeared to have changed the game, with central banks recognising that something had broken in the system and, perhaps, more caution was warranted. Banks had already reined in lending to small businesses and the crisis is likely to accelerate that. Central banks have acknowledged that this is likely to act as a de facto rate rise.
However, jobs dated remained a headache for central banks, with tight labour markets across the world and continued wage growth. The latest US jobs report suggests the tide might finally be turning.
Oxford Economics says “Job openings remain highly elevated, but February's level is the first month below 10,000 since June 2021 and suggests businesses are becoming more wary about additional headcount…The ratio of unemployed per job opening - which Fed officials pay close attention to - dipped to 1.7, the lowest level since November 2021.”
There is some way to go. Oxford Economists says job openings will need to stay on a sustained downward trend if they are to move closer to pre-pandemic levels of around 7m. Quit rates are also relatively buoyant, suggesting workers feel confident in finding new employment.
Nevertheless, data is increasingly pointing to an early peak in interest rates, certainly earlier than the Fed ‘dot plot’ would suggest, which has barely changed since December. However, the problem is that bond markets have priced in ambitious cuts in US rates already, forecasting the first cut as early as July.
However, for equity markets it may not matter what the bond market thinks, and it may simply focus on the fact that a pause in the interest rate cycle is imminent. This would finally help it break out of the trading range in which it has been stuck for the past six months - and arguably longer.
