The Major US Narrative that you Need to Know

The Major US Narrative that you Need to Know
Sometimes markets are nearly eclipsed by a narrative and this is one of these times. The path of US interest rates has been uncertain since the start of the year. At the start of January, the Fed was seeing no rate cuts until 2024 in its December dot plot. This was in contrast to the STIR market pricing which was two rate cuts and a terminal rate lower than 5%. This narrative was keeping the USD pressured allowing stocks to rally and giving a boost to precious metals. However, this narrative ‘war’ all changed with a very large US NFP print on Friday 3 and an equally impressive services PMI print.
What’s the narrative now?
After the stunning NFP print, the STIR markets pricing started to move towards the Fed’s December dot plot projections. They saw a terminal rate of over 5% and only one rate cut into the end of the year. This resulted in stock selling, USD strength, and precious metals falling. So, the major question now is this, ‘is the labour market tight?’. The reason it is a question is because there are some conflicting data reports. Yes, we had that stunning NFP print, but was that a strange one-off? Powell brushed it off last week as an anomaly. It was only the second time in 25 years that the print had exceeded maximum expectations (which were 305k) by 200K.
What’s the wider question?
The wider question is this, ‘will a tight labour market definitely lead to higher inflation?’. The Fed thinks so and it follows the Phillips Curve. This economic model postulates that lower unemployment raises wages and then the assumption is that higher wages lead to higher prices. But does it always? Could there be a scenario where higher wages don’t always lead to higher prices? In other words, can we have falling inflation and a tight labour market? If the answer to that question is yes, then the Fed will have managed its soft landing.
What does all this mean?
The path for the USD and stocks all depends on the answer to these questions. So, wage data and inflation data will continue to be major focuses for the near term. US inflation data out on Tuesday at 13:30 UK time.

About: HYCM is the global brand name of HYCM Capital Markets (UK) Limited, HYCM (Europe) Ltd, HYCM Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under HYCM Capital Markets Group, a global corporation operating in Asia, Europe, and the Middle East.
High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.
20230213