Since mid-March, the downtrend in the S&P 500 has been broken. We also note that the index is now trading above the 200-day moving average, which is actually changing direction (from bearish to bullish). Finally, the index continues to make higher lows.

One of the current drivers for risky assets is the expectation of an imminent end to the Fed's rate hike cycle. But what exactly is the case? Do equity markets systematically appreciate once the Fed has made its last rate hike? Recent history suggests otherwise. As the chart below shows, the S&P 500 and 10-year bond yields have historically fallen once the Fed was done with monetary tightening (2001, 2008, 2018).

The U.S. Labor Department announced Friday that U.S. employment rose by 236,000 in March (see chart below), compared to a Dow Jones estimate of 238,000. The figure is lower than February's figure, which was revised upward to 326,000.  The March jobs increase is the smallest since December 2020. It comes against a backdrop of monetary tightening by the Federal Reserve, which is aimed in part at slowing labor demand in order to lower the inflation rate.

While the total number of jobs was slightly higher than expected, this was mainly due to 47,000 government jobs. Private sector job creation was only 189,000, below consensus expectations (218,000) and also below February's 266,000.

The unemployment rate fell to 3.5 percent from an expected 3.6 percent. This decline was due to the labor force participation rate reaching its highest level since the covid. In fact, the participation rate increased from 62.5 percent to 62.6 percent.

The increase in payrolls was accompanied by a 0.3 percent increase in average hourly wages, bringing the 12-month increase to 4.2 percent, the lowest level since June 2021. However, this wage moderation is potentially explained by a slight decline in average hours worked from 34.5 to 34.4, below the expected 35.5.

Although the stock market is closed for Good Friday, S&P 500 futures rose following the release of the jobs report. Treasury yields also rose.

Following the release of the U.S. jobs report, the market now believes that the Fed will not pause at the May meeting, and that it will raise rates again (by 25 basis points to 5.00-5.25%). But the market also believes that this rate hike will be reversed as early as July with a 25 basis point drop to 4.75-5.00%.

U.S. bank deposits fell for the tenth consecutive week, with small banks seeing their deposits fall by some $275 billion in March. Last week, both large and small banks saw outflows again, with $48 billion for large banks (deposits at the lowest since March 2021) and $7.2 billion for small banks (deposits at the lowest since June 2021).

As a consequence of the sharp decline in deposits, lending by U.S. banks fell to a record low in March (-$104.7 billion). Tighter credit conditions should have a negative impact on US growth. 

The global economy is poised for years of slow growth, warns IMF Director Kristalina Georgieva. The world economy is expected to grow at an average annual rate of about 3 percent over the next five years, well below the 3.8 percent average of the past two decades and the lowest medium-term growth projection since 1990. There is a silver lining, however: IMF forecasts are rarely right...