To trade economic data successfully, one has to consider three things: the underlying expectations, the context and whether the data changes future expectations.

The data is by definition backward looking but the market is a forward looking machine. I talked about it here. The NFP report is old news now because it doesn’t incorporate the latest developments i.e. worse than expected tariffs announcement.

Therefore, a bad report is likely to have a bigger impact because it would reinforce recessionary fears, while good data might get faded because traders would expect worse figures in the next months.

Fed Chair Powell, on the other hand, has the power to turn the sentiment around because his words would have a forward looking impact. In fact, if he were to place more emphasis on growth risks and open the door for cuts despite higher inflation and inflation expectations, then we should see a relief rally in risk assets as that would mean that the Fed is coming in support.

I expect that to be also the catalyst for a short term top in long term bonds and aggressive rate cuts expectations because that would really raise the risks of higher inflation in the future.

Coversely, if Powell were to remain on the sidelines, then we will likely see further selling in risk assets because the market would expect more pain ahead without Fed support and the rate cuts bets would keep on increasing on expectations of bigger cuts down the road to combat a potential hard landing.

This article was written by Giuseppe Dellamotta at www.forexlive.com.