Record Highs and Rate Cut Anticipation Propel S&P 500; Powell's Testimony and Global Sentiment Influence Markets | Daily Market Analysis

Key events:

• USA - Average Hourly Earnings (MoM) (Feb)
• USA - Nonfarm Payrolls (Feb)
• USA - Unemployment Rate (Feb)

The S&P 500 achieved a new record high on Thursday, driven by gains in the tech sector. Federal Reserve Chair Jerome Powell's reaffirmation of potential rate cuts this year fueled investor confidence, reinforcing the belief that global central banks are likely to initiate monetary policy easing measures in June.

The S&P 500 surged by 1%, reaching a historic high of 5,156.84. Simultaneously, the Dow Jones Industrial Average experienced a 130-point increase, equivalent to 0.4%, while the NASDAQ Composite posted a notable 1.5% jump.

During his second day of congressional testimony, Powell emphasized that the Fed is approaching the confidence threshold required to implement interest rate cuts this year, echoing statements made the previous day.

Optimism surrounding anticipated rate cuts by major central banks in June gained momentum following the European Central Bank's decision to maintain rates while revising down its inflation forecast, indicating faster-than-expected progress.

European sovereign bonds, which move inversely to yields, reacted by surging, impacting near-term US Treasury yields. The yield on the 2-year Treasury, for instance, dropped by 4 basis points to 4.52%.

In labor market developments, the number of Americans filing new claims for unemployment benefits remained steady at 217,000, suggesting further signs of easing in the job market just ahead of the crucial non-farm payrolls report.

Meanwhile, US job openings declined by 26,000 in January, accompanied by a decrease in hiring, indicative of a gradual easing in labor market conditions.

As anticipation builds for the upcoming nonfarm payrolls release scheduled for Friday, it is expected to provide additional insights into the strength of the US economy.

Embarking on a triumphant three-day streak, the Australian Dollar is making waves on Friday, propelled by the looming possibility of the US Dollar embarking on a downward trajectory. Federal Reserve Chair Jerome Powell, during his second day of testimony before the US Congress, stood firm in the central bank's position. Powell subtly hinted at potential cuts in borrowing costs later in the year, contingent upon the inflation trajectory aligning with the Fed's 2% target.

The Australian Dollar's ascent finds support in an elevated market sentiment, driven by a surge in equity markets. Notably, the S&P/ASX 200 Index has notched new record highs, riding the coattails of a tech-led rally on Wall Street. This optimistic trajectory is underpinned by expectations that major central banks may enact interest rate cuts in 2024, fostering increased confidence throughout the overall market.

Despite reservations about the Australian domestic economy's lackluster expansion in the fourth quarter and the Trade Balance surplus falling short of expectations, the Australian market displays resilience. Economic indicators are sparking discussions around the Reserve Bank of Australia potentially considering rate cuts in the near future. Market speculation even suggests that the RBA might initiate rate cuts as early as August, anticipating a total easing of 45 basis points for the year.

In the early hours of Asian trading on Friday, the USD/JPY pair descends to fresh five-week lows, breaching the 148.00 mark. A weakened US Dollar and mounting speculation that the Bank of Japan might pivot from its ultra-loose monetary policy exert selling pressure on the USD/JPY. Currently, the pair hovers at 147.70, reflecting a 0.26% decline on the day.

Remarks from the Bank of Japan's governor and board members on Thursday indicated a positive trajectory toward the central bank's 2% inflation target. This development raises the prospect that the BOJ may consider discontinuing its negative interest rates, marking the potential end of a policy in place since 2007. The hawkish stance articulated by BoJ policymakers propels the Japanese Yen to a one-month high against the USD.

In the early hours of Asian trading on Friday, the EUR/USD pair makes strides to reach new multi-week peaks around the mid-1.0900s. Opting to maintain its monetary policy unchanged on Thursday, the European Central Bank stays committed to steering inflation back into its target range. Now, attention shifts to the eagerly awaited US Nonfarm Payrolls release on Friday. Currently, the major pair hovers around 1.0947, reflecting a marginal 0.01% uptick on the day.

During Thursday's session, the ECB chose to keep interest rates steady, adhering to a policy appropriately restrictive until inflation aligns with the ECB’s target. However, there is speculation that a potential rate cut might be on the horizon at the June meeting if evidence of improving inflation persists.