The Fed calms markets ahead of payrolls

European stock markets are mixed on Thursday, the FTSE 100 is eking out a gain while the Eurostoxx index is slightly lower. We expect to see some variety in performance as we lead up to the payrolls report on Friday. Commodity prices are key for UK stocks right now, and with Brent crude oil edging towards $90 per barrel, the focus is on the UK’s energy sector.

Powell still matters for markets

The soothing tones of Jerome Powell who spoke at Stanford University on Wednesday, were enough for the markets to breathe a sigh of relief and for the S&P 500 and the Nasdaq to break their losing streaks so far this month. The Fed chair said that the Fed remained data dependent, but that the latest inflation figures should not stop the Fed from cutting interest rates. He also reaffirmed his view that rates should be lowered ‘at some point this year’. This helped stocks and bonds to move higher, with bond yields pulling back. The 2-year yield dropped 7 basis points, although it is still 9 basis points higher than it was last week.

The timing of US rate cuts remain unclear

Overall, the reassurances from Powell are important, and the fact that he can move the markets shows two things: 1, his speeches still have the power to move the dial for markets, especially when the outlook is  unclear, and 2, what he says matters, even if the inflation and labour market data has been surprising on the upside, the prospect of interest rate cuts are still in play. On the back of Powell’s comments, there is now a slightly higher chance of a June rate cut from the Fed, with a 61.5% chance, according to CME’s Fedwatch tool. This is up from a 55% chance a week ago. While this suggests that there is still a sizeable number of people who think a June cut is a possibility, the market is not overwhelmingly convinced, and the timing of the first hike remains up in the air.

Non Farm Payrolls: what to watch out for on Friday

The key near term risk for the interest rate outlook is the non-farm payrolls report for March, which is scheduled for release on Friday. The market is expecting a 213k reading for payrolls for last month. The overall trend in recent months has been for payrolls to remain within a range 145k, the low from October 2023, to 300k, the high from December. Any deviation either on the upside or the downside of this range could change the outlook for interest rates. However, we think that a reading around the level expected is unlikely to materially change interest rate expectations in the US and won’t have a major impact on markets. A key driver of US jobs growth recently has been education and health services, so this sector will be worth watching closely.

The FTSE 100 gets a boost from commodity prices

The FTSE 100 has mostly been able to dodge the worst of the sell-off this week and is registering a small gain at the start of Q2. The large number of oil and gas and mining companies in the FTSE 100 have boosted the index, as commodity prices have been on a tear higher. Brent and WTI oil are higher by 3.8% and 5% in the last 5 days, while aluminum and copper are up by more than 4% each. Coffee is the best performer in the agricultural commodity space and is higher by 8%. The gold price also briefly breached the $2,300 mark on Wednesday – a new record high – although it has pulled back to $2,296. The gold price appears to rally every time there is a  rise in expectations of rate cuts from the Fed. We expect this theme to continue to drive the gold price in the near term, and the precious metal could be volatile as we move towards the Non-Farm Payrolls report on Friday.

Stocks: The changing of the guard

The uptick in commodity prices has meant that miners such as Fresnillo, Glencore and Anglo American are leading the FTSE 100 so far in April, and are higher by 11%, 5% and 4% respectively. Shell and BP also have had a decent showing and are higher by 4.6% and 3.2%. There has also been a changing of the guard in the US stock market space so far this month. Paramount is leading the pack, followed by Micron Technology and then three energy companies: Marathon Petroleum, NRG Energy and Phillips 66. So far in Q2, the best performing stocks support the FTSE 100, whether or not this continues, or if Nvidia and the other tech giants come roaring back, could depend on the outlook for commodity prices and the Q1 earnings season.

Economic data watch

Ahead today, the final reading of the UK PMI service sector survey for March is released, along with 1-year CPI expectations and new car registrations. In Europe, PPI and the final reading of PMIs are in focus. In the US, initial jobless claims, challenger job cuts and the trade balance are worth watching. However, all eyes will be on Friday’s payrolls report, due to its significance for the Fed and the timing of interest rate cuts.

FX watch: the dollar slips as commodity currencies come roaring back

The dollar has slipped this week, and the dollar index dropped sharply on the back of the Powell comments on Wednesday. The biggest gainers vs. the USD this week include the Nok, SEK, AUD and NZD, which are higher by 2.6%, 1.7%, 1.6% and 1.4%, respectively. The NOK, AUD and NZD are commodity currencies, so it is no surprise that they are rallying alongside the rally in oil and industrial metals. The Swiss franc in the weakest performer in the G10 FX space so far this week. It fell further on Thursday after a weaker than expected CPI report for March. The annual rate of CPI was 1%, down from 1.2%, while the core rate also fell to 1%. The Swiss National Bank was the first of the major central banks to cut interest rates last month, and with inflation readings like this, it has room to cut further. This may keep downside pressure on the CHF in the coming weeks.