The foundation keeping the Fed on an aggressive rate hiking footing has been the US economic data. Although it has been mixed over the last few weeks there have not been any major red flags that would have obviously got the Fed’s attention. So, the US data this week is going to be important to see if the Fed will continue to affirm a 4.6% terminal rate as outlined by Jerome Powell at the last FOMC meeting.
Economic data this week
The US services PMIs are up on Wednesday. The market is expecting a fall down to 56 from 56.9 prior. The low forecast is 54, so a print below 54 will be more negative for the Fed. The US ADP jobs data is released on the same day with 205K expected up from the prior of 132K. A miss on both the headline for jobs ADP (below minimum expectations of 200k) and Services PMI on Wednesday will be negative for the USD, but positive for stocks if traders perceive this to make the Fed more cautious about an aggressive path for rates.
On Friday the US Non-Farm Payrolls will be the most significant US economic data point. The headline is expected to be 250K down from the 315K prior. The unemployment rate is expected to stay constant at 3.7%. So, if we see a miss on the headline below 200K (minimum expectations) and higher unemployment figures above 3.8% (maximum expectations) then markets will start to price in a Fed slowing on rates which should be USD negative and stock positive.
The Fed has told us that it will be data-dependent going forward, so paying attention to the data gives the market clues for the Fed’s next move and where we may see a bounce in stocks.