U.S. stock and bond investors face a big employment report this week, after returning from the Labor Day weekend to kick off September trading.
The U.S. jobs report, scheduled to be released Friday, will be “huge” from a market’s perspective, said Victoria Fernandez, chief market strategist at Crossmark Global Investments, in an interview. She said the report on jobs growth and the unemployment rate in August, has the potential to move stocks and bonds.
July employment data, released in early August, had rocked the stock market as it was softer than Wall Street expected and showed the unemployment rate rose to 4.3%. U.S. stocks have bounced back from their recent slump though, with the Dow Jones Industrial Average logging a fresh record high Friday while the S&P 500 ended 0.3% below its all-time peak notched July 16.
“The overall economy continues to look pretty strong,” said Bob Elliott, co-founder, chief executive officer and chief investment officer of Unlimited Funds, by phone. But “the jury is still out on whether we’re going to get a ‘no landing,’ a soft landing or a hard landing.”
Investors are watching the labor market closely after Federal Reserve Chair Jerome Powell remarked in his Jackson Hole speech on Aug. 23 that it has “cooled considerably from its formerly overheated state,” saying “downside risks to employment have increased.” And with inflation down significantly from its 2022 peak, Powell signaled interest-rate cuts were coming.
The highly-anticipated jobs report due out Friday may wind up being the “arbiter” between whether the Fed cuts its benchmark rate by a quarter percentage point, or a half point, at its policy meeting in September, said Phil Camporeale, a portfolio manager for J.P. Morgan Asset Management’s global allocation strategy, in a phone interview.
Camporeale anticipates the employment situation for August will look stronger than in July, potentially setting up the Fed to begin in September gradually reducing interest rates in steps of a quarter-percentage-point each. A deeper cut would signal heightened concern about the labor market and economy, he said.
Barclays analysts expect the unemployment rate declined to 4.2% in August, according to their U.S. economics research note on Aug. 29. “We see this as a partial unwinding of the jump in the unemployment rate in July that was driven in part by an increase in temporary unemployment due to Hurricane Beryl,” they wrote. They also forecast stronger jobs growth than in July.
A “nice jobs report” may lead to a rise in Treasury bond yields and a stock-market rally, according to Camporeale.
All three major U.S. stock indexes rose Friday, with the Dow DJIA, S&P 500 SPX and Nasdaq Composite COMP closing higher as investors weighed a fresh report on inflation that mostly matched Wall Street’s expectations. Each index booked gains in August, with the Dow and S&P 500 both rising for a fourth straight month.
In the bond market, Treasury yields fell in August as investors anticipated rate cuts by the Fed.
The yield on the 10-year Treasury note BX:TMUBMUSD10Y declined for a fourth consecutive month to 3.910% on Friday, but remained up the year, according to Dow Jones Market Data. The two-year Treasury yield BX:TMUBMUSD02Y also dropped a fourth straight month — its longest such streak of declines since July 2020 – to finish August at 3.926%.
While the U.S. labor market has recently softened, it is “not soft” currently, according to Roger Hallam, Vanguard Group’s global head of rates.
“But if we were to see a downside surprise in the labor-market report” on Friday, the bar for a deeper rate cut of a half percentage point in September is probably “relatively low,” he said by phone. “If we see relatively benign economic data,” though, “bond yields could rise a little bit.”
Meanwhile, traders in the federal-funds futures market are pricing in potentially one percentage point of rate cuts by the Fed this year, according to the CME FedWatch Tool on Friday.
That’s “a little too aggressive,” said Camporeale.
“It’s almost like, if that happens, there’s a growth scare that the Fed’s dealing with,” akin to the heightened market anxiety seen after the jobs report for July came in surprisingly soft, he said.
To Elliott’s thinking, “it’s questionable whether the economy needs any cuts,” as it’s been doing “pretty good,” with asset prices “pushing all-time highs,” while inflation remains “modestly” above the Fed’s 2% target despite its rate hikes.
The Fed has maintained its policy rate at 5.25% to 5.5% since July 2023, a level that Powell described as “restrictive” during his Jackson Hole speech, saying it helped reduce inflation in the U.S. economy significantly. The cooler labor market is “no longer a source of inflationary pressures” and the Fed does not “welcome” its further cooling, according to Powell.
He also remarked that “the time has come for policy to adjust,” which was music to Camporeale’s ears. “I’ve been waiting two years for that Jackson Hole line,” he said, with the Fed signaling a pivot to cut rates.
Camporeale is “overweight” stocks, particularly in the U.S., saying he recently increased exposure to the equal-weight S&P 500 index on expectation breadth would strengthen in the market’s rally. Within fixed income, he said he likes high-yield corporate bonds, which are below investment-grade and provide additional yield in the portfolio.
“The probability of recession remains low,” said Camporeale. “The consumer remains resilient, supporting the economy,” while “inflation data continues to moderate in the right direction.”
U.S. stock and bond markets will be closed Monday in celebration of Labor Day.