What does Friday’s jobs report mean for the market? “Too hot” and stocks could fall, says market professional

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With Federal Reserve Chairman Powell last week confirming plans to continue raising interest rates to reduce inflation despite the risk of a recession, Friday’s monthly US jobs report could once again pose risks to the stock market , said Tom Essaye, a former Merrill Lynch trader. founder of the Sevens Report newsletter.

The Labor Department’s monthly report on Friday, which tracks public and private sector employment, is expected to show the U.S. economy added 318,000 jobs in August, far fewer than the 528,000 jobs created in July, according to a survey of economists. . from the Wall Street Journal. The unemployment rate looks steady at 3.5%, while average hourly earnings are expected to rise 0.4%, after a 0.5% rise in the previous month.

“The labor market needs to show signs that it’s on its way back to a state of relative equilibrium, where jobs are roughly equal to the number of people looking for work — and if it doesn’t show that, then concerns about the Fed will rises more, and that’s not good for stocks,” Essaye wrote in a note on Thursday.

I see: The US likely added 318,000 jobs this month – but watch out for an August surprise

‘too hot’

According to Essaye, if employment results are “very hot” with nonfarm payrolls rising more than 350,000 per month and the unemployment rate falling below 3.5%, stocks will fall sharply to something that it could be a “less intense repeat” of last Friday as markets priced in higher rates for longer.

US stocks fell last Friday, with the Dow Jones Industrial Average DJIA,
-0.03%
closing more than 1,000 points for their worst daily percentage drop in three months, after Chairman Powell said in a speech in Jackson Hole that the central bank would continue the battle to return the annual inflation rate to its 2% target “until job done Done”.

“Such strong numbers would underscore that the labor market remains out of balance, and that would keep the Fed focused on slowing demand through higher interest rates,” Essaye said. “In practice, this would increase the chances of the ‘terminal’ fed funds rate moving above 4% and hopes of a rate cut in 2023 would likely be dashed.”

He expects the yield curve spread between the T-bill’s 10-year and 2-year notes to widen as the 2-year yield jumps higher on the prospect of higher interest rates, while the 10-year yield will likely rise, but less so.

2-year bond yield hits fresh 15-year high TMUBMUSD02Y,
3.519%
to 3.528% on Thursday, while the 10-year Treasury yield TMUBMUSD10Y,
3.257%
climbed to 3.266%, its highest level since late June.

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‘Just right’

However, if job growth falls to a range of zero to 300,000 while the unemployment rate rises above 3.7%, the stock market can expect a modest rally given the decline in stocks over the past five days, according to Essaye .

US stocks were mixed in slow trading on Thursday. The Dow Jones Industrial Average DJIA,
-0.03%
increased by 40 points or 0.1%. The S&P 500 SPX,
-0.27%
lost 0.1%, while the Nasdaq Composite COMP,
-0.91%
was reduced by 0.8%. All three major indexes fell for four consecutive sessions.

“We wouldn’t expect a surge higher in stocks because a ‘Just Right’ jobs report still doesn’t bring back the idea of ​​an imminent Fed pivot,” Essaye said. “(That) would not make the Fed more aggressive and keep alive the hope that the Fed could cut rates in 2023.”

‘Very cold’

In a worst-case scenario with a negative jobs print for August and a rise in the unemployment rate, stocks may jump on a “bad is good” mentality, although the Fed will not move away from its monetary tightening as “a soft number will Change the Fed’s calculation for the next several meetings — “we still get 50-75 bps in September,” so we wouldn’t be willing to chase that rally,” according to Essaye.

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