Hawkish Powell weighs on risk – what to do next?

Tomorrow, the Non-Farm Payrolls report for February will be released in the United States. This is not your regular NFP week for at least a couple of reasons.

First, the NFP is usually out on the first Friday of the new month. Only this time, it is different because February was a short month. Hence, the February NFP report was moved one week away.

Second, Tuesday and Wednesday, the Federal Reserve Chair Jerome Powell held its semiannual testimony in front of the Senate and House. All eyes were on what he’ll say about monetary policy, and markets had moved already by the time he started to speak.

Powell turned out to be really hawkish. He repeatedly said that recent data grants bigger hikes, and the market believed him.

As such, the dollar surged across the board, and stocks tanked.

Bets that the Fed will hike by 50bp in March increased significantly

The issue was that a rate hike at the March meeting was already priced in, but only a 25bp one. Immediately after Powell’s testimony, market participants raised the probability the Fed would hike 50bp on March 22 to close to 70%. One day later, the probability reached over 80%.

So is a 50bp rate hike in March granted?

It all depends on the future data, including the NFP this Friday and the inflation data due next week.

All eyes are on the unemployment rate

It is known that job data is a lagging economic indicator. Also, rate hikes or cuts need time to make their way into the economy.

So far, the jobs market has turned out to be resilient. For instance, the previous NFP report surprised everyone, with the US economy adding more jobs in January than any economist predicted.

But it might be that the lagging explains the jobs market resilience.

During this week’s testimony, Powell said several times that a higher unemployment rate indicates that the fight against inflation is on the right track.

Hence, if the unemployment rate ticks higher on Friday, we might just see a quick reverse of the moves seen in financial markets this week.