Markets Build Risk Appetite as ADP Nonfarm Exceeds Expectations

On Wednesday, 15:15 (GMT+2), data for the February US ADP Nonfarm Employment Change was released. At 475,000, the number beat out the market estimate of 378K, although it is still lower than the previous month’s 509,000. Broken down, February’s numbers indicate a significant employment drop of 96,000 in small businesses, although overall numbers are buoyed by an increase of 552,000 in large businesses.

Said Nela Richardson, chief economist, ADP. “Small companies lost ground as they continue to struggle to keep pace with the wages and benefits needed to attract a limited pool of qualified workers.”

Meanwhile, Fed chair Jerome Powell has indicated support for a more cautious 25-point rate hike in March, although the Fed was “prepared to move more aggressively” should inflation not subside. While the markets have been gradually reducing bets of a 50-point rate hike ever since tensions between Ukraine and Russia began, Powell’s latest comments have moved the needle significantly.

Post-market Effects

Following Powell’s comments, the US Dollar Index plunged while the equities markets rallied as risk appetite returned. US Treasury yields have also risen, with the 10-year note moving back above 1.8%.

Meanwhile, gold prices have cooled, falling from their 13-month high in response to both the Fed’s cautious stance and news that talks between Russia and Ukraine were set to resume. However, spot gold is still trading above the $1920 level, with its primary pressure still coming from the Russian-Ukraine situation. Chintan Karnani, director of research at Insignia Consultants said that U.S. economic data releases “will fail to impact gold and silver and industrial metals, as long as the Ukraine crisis doesn’t show signs of de-escalation.”

While the market might be in a risk-on mood currently, analysts warn that the waters could be choppy ahead. Gus Faucher, chief economist at PNC Financial has expressed that major upside risks in the coming months “include a recession in Europe, even higher inflation because of rising energy prices, and the increasing likelihood that the Fed could be forced to raise interest rates so aggressively to combat inflation that the recovery stalls”.

In the meantime, investors are advised to keep an eye out for the upcoming US Nonfarm Payrolls data, which will be released on Friday 4 March, 15:30 (GMT+2). As a friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.