Fed in Focus Ahead of Friday Payrolls

US stocks extended their rally while Treasuries pared some of yesterday’s gains as markets continued to digest Yellen’s dovish comments.  With a rate hike no longer seeming imminent, emerging-market assets rallied, oil reversed a four-day losing streak, and the dollar plunged.  The futures market currently implies traders assign a 0% probability to a rate hike in April and only a 28% chance in June, down from nearly 50% last week.  Yellen’s cautious tone came only a few days after several regional Fed Presidents gave an upbeat assessment on the US economy, setting up what could be a lively debate (and potential large dissenter group) when the committee next meets April 26-27.  Even Chicago Fed President Evans, considered one of the more dovish current Fed members, said today that he believes the strength of the economy will justify two hikes this year, with the first one most likely in June.

While markets were largely focused on the Fed, data released today showed private companies are continuing to add jobs.  The ADP employment report showed 200,000 jobs were added this month, narrowly missing the 205,000 pace in February.  While the service sector continues to lead the charge, even the struggling manufacturing sector reversed its recent contraction and added 3,000 new jobs in March.  The ADP data comes two days ahead of the more widely followed and highly anticipated nonfarm payrolls report, which is expected to show the labor market continues to grow at a healthy pace.
 
All three major US stock indexes are up close to 0.50%, while Treasury yields and swap rates are steepening with a 7 year pivot point – with shorter maturity yields down 1-2 basis points, and longer maturity yields up 1-6 bps.