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What does Friday’s jobs report mean for the market? ‘Too warm’ and stocks could tumble, says market pro

Here's what to expect on Wall Street tomorrow when US jobs data is released, according to a market pro

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

The Labor Department’s monthly jobs 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 the report. a survey of economists by The Wall Street Journal. The unemployment rate is stable at 3.5%, while the average hourly wage is estimated to increase by 0.4%, after rising 0.5% in the previous month.

“The labor market should show signs that it is moving towards a return to a state of relative equilibrium, where vacancies are roughly equal to the number of people looking for jobs – and if that doesn’t show, there are concerns about a the more aggressive Fed will rise, which is not good for stocks,” Essaye wrote in a note on Thursday.

To see: The US may have added 318,000 jobs this month – but watch out for a surprise in August

‘Too hot’

According to Essaye, if employment results get “too hot” with nonfarm payrolls rising more than 350,000 this month and the unemployment rate falling below 3.5%, inventories would plummet in what could be a “less intense repeat” of last year. year could be. Friday, as markets discount higher interest rates longer.

US stocks plunged last Friday, with the Dow Jones Industrial Average DJIA,
+0.46%
close of more than 1,000 points to the worst daily percentage drop in three months after Chairman Powell said in his Jackson Hole address that the central bank will continue its fight to bring annual inflation back to its target of 2% “until the job is done.”

“These strong numbers would underline that the labor market remains unbalanced, and that would keep the Fed focused on slowing demand through higher rates,” said Essaye. “Practically speaking, this would increase the likelihood of the terminal fed funds rate going above 4% and hopes of a rate cut in 2023 would likely be thwarted.”

He expects the spread between 10-year and 2-year Treasuries to widen as 2-year yields move higher on the prospect of higher yields, while 10-year yields are also likely to rise, but less.

2-Year Treasury Yields Hit New 15-Year High TMUBMUSD02Y,
3.504%
at 3.528% on Thursday, while the 10-year rate TMUBMUSD10Y,
3.263%
climbed to 3.266%, the highest level since the end of June.

To see: ‘Get ready for an epic finale’: Jeremy Grantham warns ‘tragedy’ looms as ‘super bubble’ could burst

‘Exactly right’

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

US stocks were mixed in late trading Thursday. The Dow Jones Industrial Average DJIA,
+0.46%
rose 40 points, or 0.1%. The S&P 500 SPX,
+0.30%
lost 0.1%, while the Nasdaq Composite COMP,
-0.26%
was 0.8% lower. All three major indices have fallen for four consecutive sessions.

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

‘Too cold’

Worst-case, with a negative jobs figure for August and a spike in the unemployment rate, stocks could adopt a “bad is good” mentality, although the Fed won’t turn away from its monetary tightening because “a soft figure won’t change the economy.” Fed’s calculation for upcoming meetings – “we’re still getting 50-75 bps in September,” so we wouldn’t be inclined to chase that rally,” said Essaye.

To see: What history says about September and the stock market running out after the summer bomb?

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