A Soft February Jobs Report Could Set Up the Next Rally for Stocks, But Can It Save Them From Fed Hawks?

Investors in the U.S. stock market eagerly await Friday’s jobs report, hoping for signs of weakness in the labor market. If such signs are found, it could give the Federal Reserve more room to go easy with its next interest rate hike on March 21-22. However, the magnitude of deterioration in the labor market might not be large enough to alter the rate consensus or even reset market policy expectations, warns Sven Schubert, head of macro research of Vontobel’s Vescore Boutique in Zurich, Switzerland.

Powell’s Testimony and Economic Data

Fed Chair Jerome Powell’s semiannual monetary policy testimony before Congress earlier this week focused more on a flurry of economic data set to release between now and March 22. This data includes Friday’s February jobs report, next week’s consumer-price index, and updated readings on the producer-price index and retail sales.

Powell’s comments that the central bank may need to raise interest rates higher than expected in response to recent strong economic data have deepened investor expectations of re-accelerating the rate hikes at the March meeting. However, investors hope for a “softer” employment report on Friday, which could cause the Fed to take a lighter touch in raising interest rates.

The Contradiction of Rising Inflation and Collapsing Economic Conditions

Investors hope a softer February jobs report could alter monetary policy expectations and prompt the Fed to take a lighter hand in interest rate hikes. However, that contradicts the view that inflation is re-accelerating while at the same time predicting economic conditions to collapse. The upcoming jobs report is crucial because any sign of slowing job gains could undermine the view that the labor market is still hot, a core inflation driver.

Related Facts

• Economists surveyed by The Wall Street Journal expect the U.S. economy to add 225,000 jobs in February, slower than the originally reported 517,000 spikes in January.
• Dan Victor, an associate at Posto Asset Management, believes that a soft jobs report or cooler inflation trend could cause a boost in stocks as interest rate forecasts roll back and evidence of the disinflationary process surfaces.
• Sven Schubert of Vescore Boutique warns that while signs of softening in the labor market are surfacing, they may not be significant enough to alter the rate consensus or reset market policy expectations.

Key Takeaway

Investors are hoping for a soft February jobs report prompting the Fed to take a lighter hand in raising interest rates. However, given the contradiction of rising inflation and collapsing economic conditions, it remains to be seen whether a slower addition of jobs will truly set up the next rally for stocks or even save them from the clutches of the Fed hawks.

Conclusion

Investors are eager for insight into the condition of the labor market as they prepare for the upcoming Fed meeting. While a soft February jobs report may be caused a boost in the stock market, the situation remains fluid, and investors will need to keep an eye on upcoming economic data to understand the full implications of the meeting.