FOMC and NFP are the Focal Points

The odds of a March rate cut in the US have narrowed considerably from the start of the start, owing to a continuation of solid macro data. If this week’s Non-Farm Payrolls data confirms that the labour market remains in a robust state, we could see the timeline for when the Fed may commence monetary policy easing pushed back a few more months. Essentially, the tone of the Fed and the outcome of the NFP data will provide crucial clues in this ongoing ‘rate cut guessing game’ which markets remain transfixed on.

While investors await these two key events on the economic calendar this week, earnings season (in the US) has been rolling on and so far, there have been no major alarm bells being rung. In general, S&P500companies have surpassed expectations on the earnings front to date which is keeping fears of a ‘hard landing’ in the shadows.

Australian Q4 (2023) CPI data came out on the softer side of forecasts which will give the RBA justification to maintain a pause on interest rates at the meeting next week. The AUDUSD rate dipped following the release of the inflation figures. Meanwhile the US Dollar Index (DXY) is in a tight range around the 103.50 level ahead of the Fed meeting. If Fed Chairman Jerome Powell does not produce rhetoric as dovish as the market would like, we could see the DXY making a run back towards the 104 level. Conversely, if the FOMC signals that rate cuts are on the near horizon, the USD and bond yields will likely take a dive on expectations of narrowing yield differentials.

In commodities, gold has been edging higher this week with geopolitical tensions keeping the precious metal supported as part of a safe-haven play. The spot price crept back above the $2030 level, though moves of more significance will likely be reserved for after the FOMC meeting. Any raised hopes for near-term US rate cuts could see gold making a run back beyond$2050.

The oil price has recaptured some risk-premium with the Brent and WTI contracts pushing higher. There is no let-up in tensions around the Middle East which is keeping potential supply disruptions front-and-centre, while a rosier looking global growth outlook from the IMF (International Monetary Fund) has eased demand concerns.

For the rest of the week, it will be the FOMC meeting and NFP results which will shape market sentiment. Markets will be hoping to hear Jerome Powell signal that rate cuts are on the way, but whether he ‘plays ball’ in that respect is another matter. We will soon find out.