Market momentum pauses ahead of US CPI as Friday’s jobs data fails to deliver
If markets were waiting for a sign that the Federal Reserve can start to cut rates, Friday’s employment data would have been just that. Average hourly earnings grew at the slowest pace month-on-month in two years, and the unemployment rate unexpectedly rose to 3.9% after months of remaining unchanged at 3.7%. Given the fact that the central bank has constantly been worrying about the risk of rising wage inflation, the data had the potential to spark another bad-data-is-good rally. But after months of growth on the back of resilient economic data markets seem to have missed the cue.
The US dollar selloff was halted on Friday coming to end the session unchanged from the open despite the pullback throughout the day, and both gold and US equities seem to have found a short-term top. Granted the moves over the past ten days seemed over-extended and thus the impact of the jobs data was limited. Given the magnitude of the rally over the past month, there isn’t much to worry about just yet, even if NVIDIA’s stock price dropped 11% from the highs on Friday.
US dollar index (DCY) daily chart
Past performance is not a reliable indicator of future results.
It is also likely that the market is placing more emphasis on the inflation data to be released on Tuesday. It is widely expected that the disinflation process will continue but at a very slow pace. A stronger-than-expected reading would likely cause a scare, which could deepen the correction started on Friday. The significant drop in the dollar against gold in the past week is also an important signal. With rate cuts priced in for later this year, it is expected that gold pick up momentum whilst the dollar falls. But with little change in expectations this past week in futures and bonds markets, the move in the dollar could have been caused by something else worrying investors. It may be that they are anticipating uncertainty in monetary policy, and therefore hedging their portfolios early.
US February CPI expectations
Source: reuters
The fragility in the recent risk appetite could also be keeping gold traders interested. After months of strong – and sometimes unexplained – bullish appetite, it seems like the tide could change very quickly and catch many off-guard, which favours gold as a safe haven.
For now, we will have to wait and see what the CPI data says and how that fits into the “softening economy” rhetoric driving expectations heading into next week’s FOMC meeting. Markets still seem convinced that the Fed could start cutting rates in June but a shift in these expectations following the latest data could see new momentum brought into gold, FX and equity markets alike.