The Federal Reserve left its benchmark interest rate unchanged on Wednesday for the first time since September. - MarketWatch photo illustration/Getty Images, iStockphoto
If the U.S. jobs report due at the end of this week comes in softer than expected, it may refuel market chatter about the potential for further interest rate cuts this year by the Federal Reserve, propelling stocks to resume their rally, after the central bank paused its monetary policy easing on Wednesday and took a “wait-and-see” approach.
Meanwhile, the White House said Saturday that Trump was imposing import tariffs on Canada, Mexico and China from Tuesday, leading the three trading partners to promise retaliation.
The Fed last week left its policy rate unchanged for the first time since delivering its initial rate cut in September. The Fed funds rate stands in the range of 4.25% to 4.5%.
Fed chair Jerome Powell said there was “no hurry” for the Fed to move, but that signs of a weaker job market or good inflation news might get the central bank off the fence sooner.
Investors will closely watch the January jobs report to be released on Friday, which may provide clues on both the jobs market and inflation.
The January jobs report is likely to be soft, in part due to the sudden deterioration in weather in many areas in the U.S., according to Bill Adams, chief economist at Comerica Bank.
Economists polled by the Wall Street Journal estimated about 175,000 jobs being added in January, down from a 256,000 increase in December. They estimated the January unemployment rate to be unchanged at 4.1% from December.
If the January jobs report turns out weaker than expected, it could restart market chatter about potential rate cuts this year, Adams wrote in a Friday note.
Fed fund futures traders are still pricing in a roughly 89% chance that the central bank will cut its key interest rate at least once this year, according to the CME FedWatch tool.
The expectation for continued rate cuts this year is an important support for the bull market, Tom Essaye, founder and president at The Sevens Report Research, wrote in a Thursday note.
U.S. stocks ended last week mostly lower, as attention on Chinese artificial intelligence startup DeepSeek raised the prospect of cheaper AI models, leading to a selloff in technology stocks.
The Dow Jones Industrial Average DJIA fell 0.4% on Monday, and the S&P 500SPX declined 0.8%. The Nasdaq Composite COMP lost 1.3%.
Still, Thomas Hainlin, investment strategist at U.S. Bank, said he is cautiously optimistic about U.S. equity prices this year.
“I think it’s a period where you’ve got a much lower volatility of interest rates in terms of what the Fed may do this year,” Hainlin said in a phone interview. That provides a much different backdrop from the past few years, Hainlin noted.
The Fed started raising its policy rate in 2022, and kept the rate unchanged in the range of 5.25% to 5.5% from August 2023 to August 2024 in order to lower inflation seen in the wake of the 2020 pandemic.
“We just have this environment where growth is good. Interest rates seem relatively stable and inflation seems relatively stable. We still think that’s a pretty strong backdrop for solid equity price potential going forward,”noted Hainlin.
For the jobs report, investors should also pay close attention to the wage costs, which serve as an important factor in inflation, according to Hainlin.
“I think that [the elevated wage costs] has been influential in the Fed’s decision to hold interest rates steady,” said Hainlin. For the Fed to consider lowering interest rates again, “they’d have to have some high level of confidence that inflation is back towards a downward path,” Hainlin said.
Notably, Trump’s crackdown on immigration may cause a much sharper-than-expected downturn in the jobs growth in 2025, according to economists at the Standard Chartered. The economists estimated that two-thirds of the non-farm payrolls, or NFP growth in 2024 was driven by undocumented immigrants.
“The Fed has cited robust NFP data without generally distinguishing whether this represents added supply or demand. If employment growth is more the result of supply than demand, monetary policy may have been more effective than thought,” the strategists wrote.
“President Trump and Fed doves may be correct in seeing monetary policy as unnecessarily tight,” they noted.
However, Nancy Vanden Houten, the lead U.S. economist at Oxford Economics, held a different view. The potential for mass deportation may lead to a shortage of workers, renewing upward pressure on wages and inflation, she said.
In addition, investors have also been seeing a rotation out of big tech stocks, which have been leading the market rally so far, into small-cap and value stocks, following the tech selloff last week, as the Dow ended the week higher while the Nasdaq Composite finished sharply lower, noted Charlie Ripley, senior investment strategist for Allianz Investment Management. The S&P 500 financial sector also hit a record close at 861.30 on Jan. 30.
The market outside of tech stocks looked “pretty healthy” last week, Ripley said. If the market could see a broadening of the rally, it would be supportive of future gains, Ripley said.
