The prevailing dovish bias in interest rates is maintaining optimism in the equity market, as traders eagerly await the Nonfarm Payrolls (NFP) report to complete the puzzle of the labor market’s rebalancing and reinforce expectations of interest rate cuts. Despite the importance of the government’s jobs report, the continued strength in risk assets suggests that the bar is set relatively high for the report to deliver an unambiguously strong or hawkish message.
Even in the face of a robust jobs report, the Fed‘s current policy stance is less urgent given that core inflation is near target on a sequential basis and commodity price pressures remain subdued. With benign inflation dynamics, equities have ample room to react positively to robust data.
On the downside, market sentiment leans towards the belief that the “Fed put” is in play, as the central bank is expected to be more accommodative in the event of a significant deterioration in economic data, especially if deflationary concerns become more pronounced.
Looking ahead to next week’s Federal Open Market Committee (FOMC) meeting, traders are wary of anything above two in the rate cut column, as it could fuel speculation of early easing, especially if Chairman Powell provides a less forceful pushback. However, with the market pricing in a more aggressive easing profile, there is significant risk going into the meeting, so traders are reluctant to add directional risk unless there is a significant miss or beat in the NFP print.
Meanwhile, after Bank of Japan speculation reached a fever pitch in Asia, USDJPY shifted higher amid market overshooting speculation and a lack of policy pivot clarity from Governor Ueda.
In the oil market, prices rose on Friday after Russia and Saudi Arabia called for intervention to ensure OPEC+ members adhere to agreed production cuts. Brent crude, the international benchmark, rose 1.6% to $75.20 per barrel, while West Texas Intermediate, the U.S. benchmark, rose 1.4% to $70.33. The rally came after a meeting between Russian leader Vladimir Putin and Saudi Crown Prince Mohammed bin Salman, which underscored ongoing efforts to stabilize global oil markets and manage production levels.
