Stocks bounce on hopes Fed will delay rate hike
Before the Easter break, when markets were closed for Good Friday, the few traders left staffing Wall Street futures desks were delivered a shock: The worst jobs report in two years. Nonfarm payrolls expanded by just 126,000 versus the 247,000 consensus estimate. Averaging the last few months, there seems to be a clear deceleration trend from the highs of last summer.
The report undermined one of the last remaining bright spots amid a recent slowdown in U.S. economic data. Moreover, it may have also raised traders' fears the Federal Reserve, which seems committed to raising interest rates this year for the first time since 2006, would tighten policy prematurely and possibly repeat the blunders of 1937 that extended the pain of the Great Depression.
Moreover, policymakers have reemphasized the data dependency of any rate-hike decisions, including comments Monday from New York Fed President William Dudley. If this is true, we are likely to see a further softening of the Fed's economic outlook in its upcoming policy announcement on April 29.
So, the narrative flipped. Bad news is good news again as traders remembered the Fed has emphasized the need for confidence that job growth would continue and inflation, which is currently well below its two percent target, would normalize.
Stocks blasted higher on Monday in response to the prospects of lower interest rates for longer. The Dow industrials jumped 118 points, or 0.7 percent, to close at 17,881. The S&P 500 tacked on 14 points, or 0.7 percent, ending at 2,081. And Nasdaq rose 30 points, or 0.6 percent, to finish at 4,917.
The Fed funds futures market has further pushed out its expectations of the pace and timing of interest rate hikes, while Wall Street analysts are increasingly talking up the potential for no action on policy tightening until early 2016.
The chart above, from Cornerstone Macro, illustrates how the futures market has marked down its rate path estimate; but still remains much more pessimistic than the Fed's forecast, which is represented by the dotted line. The divergence used to be larger before the Fed's March policy announcement in which Fed policymakers halved their estimate of the number of rate hikes this year from four to just two.
The flow of the data, and the persistent disconnect between the expectations of bond traders and Fed officials, suggests a further cut to the Fed "dots" will be seen when these forecasts are updated in June.
There is a chance, however, that the U.S. economy quickly regains its footing after a being hit by another severe winter. The government's data series that monitors the number of people who have a job but can't work because of bad weather was the fifth highest for March in over 30 years.
Cornerstone's high-frequency economic monitors on employment, retail sales, housing, and manufacturing activity are all improving -- suggesting that a bounce in activity is happening as we enter the second quarter. And while the headline number on the jobs report was a disappointment, wage data was a pleasant surprise with average hourly wages over the last three months rising at a 2.8 percent annual rate versus the prior three months. Compare that to the 2.1 percent rate seen over the past twelve months.
As the Fed nears another decision point on the path of monetary policy, the stock market is nearing a key level as well: The NYSE Composite is once again approaching overhead resistance that has constrained the broad measure of equity performance since last July. A breakout could result in a resumption of the easy gains seen in 2013 and early 2014.
