Markets have pushed out the timing and extent of Federal Reserve rate cuts on the heels of Friday's surprisingly solid jobs report. That's in keeping with Fed Chairman Jerome Powell's hawkish shift in early April, after the launch of reciprocal Trump tariffs.
But the S&P 500 and Treasury markets may be in for a bit of a surprise on two fronts. Powell may temper his characterization of the labor market as being "solid," despite the official April jobs data. Further, Powell may not sound quite as alarmed about the inflationary effects of Trump tariffs as he did on April 4.
Fed Rate-Cut Outlook
At the March 19 Fed meeting, policymakers penciled in a half point in rate cuts this year as part of a broader outlook for slower (1.7%) growth and higher (4.4%) unemployment.
Yet, in recent weeks, markets had been pricing in a likelihood of a full percentage point in rate cuts amid stiffer growth headwinds from Trump tariffs.
Powell has stressed that what matters for monetary policy is the full spectrum of Trump policies, including not just tariffs, but fiscal, immigration and regulatory changes. Further, Powell has said that the strong economy allows the Fed to wait for clarity on forthcoming policies before resuming rate cuts from the current restrictive level.
That stance essentially ruled out a rate cut on Wednesday. Following Friday's jobs report, markets are now also betting against a rate cut at the June 18 Fed meeting. Odds of a cut tumbled to 32% from 66% a week ago, according to CME Group's FedWatch tool.
Markets still see 80% odds of a rate cut at the July 30 Fed meeting, though that's down from 95% a week ago.
For the full year, markets now see a likelihood of 75 basis points in rate cuts. Odds of a full point worth of cuts have slipped to 41% from 68% a week ago.
Fed Labor Market View
While Friday's jobs report pushed out the expected timing of the next rate cut, the Fed may not be reading the data the same way that Wall Street is.
There are plenty of reasons not to put much weight on the April jobs report's 177,000 headline payroll gain. First, job gains over the prior two months were revised lower by a combined 58,000, completely offsetting April's upside surprise.
Additionally, the job report's employer survey is based on a survey that covered the pay period including April 12. Only 27% of surveyed firms have a one-week payroll period. The upshot is that any layoffs in the wake of President Donald Trump's April 2 reciprocal tariff launch may have had to come within three days to show up in the April jobs report.
The Fed relies on a broad range of data beyond the Bureau of Labor Statistics monthly employment report, which can be subject to significant revisions. For example, the Fed has said it measures private employment using data from payroll processing firm ADP. ADP's own estimate of private job growth in April was just 62,000, the lowest since July.
The Fed released its own anecdotal Beige Book report on economic conditions on April 16, covering roughly the same period as the jobs report. The Beige Book found "a slight deterioration" in labor market conditions compared to the prior report in late February, with employment "little changed to up slightly." Three of 12 Federal Reserve districts reported a slight decline in employment, up from one of 12 in the prior report.
Other indicators paint a similarly dampened picture. Continuing jobless claims have hit a multiyear high. New job postings at Indeed job site have fallen 6% since April 2, Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a Friday note.
Powell's Reaction To Reciprocal Tariffs
In an April 4 speech, Powell noted that the tariffs unveiled two days earlier were "significantly higher than expected" and likely to have a bigger effect in raising inflation than prior Fed projections showed.
In his news conference after the March 19 Fed meeting, Powell said the base case is that tariffs would have a "transitory" inflation impact. But he took a less flexible tone on April 4, saying the effect on prices "could be more persistent." He added: The Fed's job is "to make certain that a one-time increase in the price level does not become an ongoing inflation problem."
Now that Trump has put a 90-day hold on reciprocal tariffs above 10% and is negotiating deals with individual countries, the question is whether Powell will soften his tone.
Powell's fear may have been soothed slightly by a negligible 0.03% March rise in the Fed's primary inflation gauge, the core PCE price index, as lower airfares and hotel room rates offset firmer goods prices.
S&P 500
The S&P 500 is off 0.4% in Tuesday morning stock market action, coming off early lows but losing ground for a second day after a nine-day, 10.25% winning streak.
On Monday, the S&P 500 finished 8% below its Feb. 19 all-time closing high, but up 13.4% from its April 8 52-week closing low.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
