US economic data displays further signs of weakness

Findings for the financial markets yesterday, April 5^th, displayed signs of a typical risk-off day as the stocks and yields fell plus the US treasuries rallied. This is amidst concerns growing over rising recession rates and the US jobs data, which will be of interest to investors when it comes out on Good Friday.

There was revealed to be a slowdown more than expected in US services from the latest US ISM data findings. The trade deficit grew whilst the ADP report showed the US economy added roughly 145,000 new private jobs in the previous month which was 55,000 less than what analysts thought.

Senior Analyst of Swissquote Bank, Ipek Ozkardeskaya, has provided expert insight into what is occurring in the US financial markets. She claimed the soft data "spurred the expectation that the Federal Reserve (Fed) could soon be done with the interest rate hikes. The US 2-year yield dipped below the 3.70% level, and the 10-year yield is now below 3.30%."

She added that after the dollar index was faced with a new two-month low but managed to rebound in Asia, the chance for "a 25bp hike for May FOMC meeting is now given around a 50-50 chance when looking at the activity on Fed funds futures."

In addition, Ozkardeskaya claimed that President and CEO of the Federal Reserve Bank of Cleveland, Loretta J. Mester has some input with the probability of no rate hike potentially not high.

The senior analyst further mentioned how Mester spoke of the Federal Reserve in not moving "the rates above 5% this year – come hell or high water – to fight inflation. Her words have also been reinforced by a surprise 50bp hike from the Reserve Bank of New Zealand (RBNZ) earlier this week."

Ahead of the US jobs data releasing on Good Friday, Ozkardeskaya's expectations are: "The US economy may have added around a quarter of a million new nonfarm jobs last month, the unemployment rate is seen steady at a multi-decade low of 3.6% and earnings may have grown slightly stronger on a monthly basis, but slower on a yearly basis."

Through clear weak growth in salaries and a significant weakening of the NFP figure, Ozkardeskaya believes evidently "the Fed should stop hiking further and let the nearly 500bp hike since last year work its way through the economy, along with some tightening in credit conditions due to the bank stress."

She added that "If the data is stronger-than-expected, which is not the base case scenario, the pricing of a 25bp hike should slightly improve, but investors won't run to conclusions before next week's inflation release."

In regard to the US jobs data, the world's most-watched data point, Ozkardeskaya said many traders from developed countries not being in the office means "many stock markets will be closed. And for those markets that will still be up and running, the trading volumes will be thin."

Up ahead, Ozkardeskaya predicts "soft jobs data from the US will likely send the short-term yields to levels that were tested when the Silicon Valley Bank collapsed last month and the dollar index to a fresh year-to-date low."

She feels that is luckless for stock markets as "the softer yields will likely not be a catalyzer of a further rally, as the recession fears should weigh on earnings expectations and the latter should weigh on the valuations and outweigh the positive impact of softer yields."

Regarding the S&P500, Ozkardeskaya feels "a downside correction below the 4000 handle, and into the 200-DMA is reasonable."

Ozkardeskaya theorises a failure to see a real improvement in US inflation means "stock traders don't have a strong foundation to build a sustainable rally on. The economic data is weak, and we don't know how fast inflation will slow."

She added: "We know that the downward path in inflation is at risk, now that OPEC is actively fighting the softening oil prices, which will, in the coming months, have a boosting effect on inflation figures."

OPEC+ reducing production by more than a million barrels each day and traders brushing off the banking stress meant the barrel of crude oil sprung by almost 30 per cent since the latter part of March. OPEC+ are looking at cutting production in order to support market stability.

Ozkardeskaya said it is positive that "the oil rally must be coming to exhaustion at around the $80/82 range, as the weak economic data and the rising recession worries will likely act as a solid resistance to the post-OPEC rally."

According to Ozkardeskaya, the "increased appetite for sovereign bonds and decreased appetite for equities due to the rising recession positioning" is what is expected this year.

Lastly, Ozkardeskaya touched on the trajectory of US papers. She said: "One of the most interesting plays could be long positioning in long-dated and inflation-protected US papers; they will likely outperform your regular long-dated papers, given that we don't know when and by how much inflation will ease."