U.S. stock and bond investors are bracing for a crucial employment report this week as they return from the Labor Day weekend to begin September trading.
The U.S. jobs report, set for release on Friday, is expected to have significant market implications, according to Victoria Fernandez, chief market strategist at Crossmark Global Investments. She noted that the report, which will detail August’s job growth and unemployment rate, could influence both stock and bond markets.
In early August, the release of July’s employment data, which came in softer than expected, caused market volatility, with the unemployment rate rising to 4.3%. However, U.S. stocks have since rebounded, with the Dow Jones Industrial Average reaching a new record high on Friday, while the S&P 500 closed just 0.3% below its all-time peak from July 16.
“The overall economy still appears robust,” said Bob Elliott, co-founder and CEO of Unlimited Funds. However, he cautioned that the outlook remains uncertain, with potential outcomes ranging from a “no landing” scenario to a soft or hard landing.
Investors are closely monitoring the labor market following Federal Reserve Chair Jerome Powell’s remarks at Jackson Hole on August 23, where he noted that the labor market has “cooled considerably” and that risks to employment have increased. With inflation significantly down from its 2022 peak, Powell hinted at the possibility of interest rate cuts.
The upcoming jobs report could be a critical factor in determining whether the Fed opts for a quarter-point or half-point rate cut at its September policy meeting, according to Phil Camporeale, a portfolio manager at J.P. Morgan Asset Management. He expects the August employment data to show strength, potentially prompting the Fed to start reducing rates in small increments. A deeper cut could indicate growing concerns about the labor market and the broader economy.
Barclays analysts predict the unemployment rate will drop to 4.2% in August, partially reversing July’s spike, which was partly attributed to temporary unemployment from Hurricane Beryl. They also expect stronger job growth compared to July.
A positive jobs report could drive Treasury bond yields higher and trigger a stock market rally, said Camporeale.
On Friday, all three major U.S. stock indexes—the Dow, S&P 500, and Nasdaq Composite—closed higher as investors digested an inflation report that largely met Wall Street’s expectations. The Dow and S&P 500 recorded gains for the fourth consecutive month in August.
In the bond market, Treasury yields fell in August as investors anticipated future rate cuts by the Fed. The 10-year Treasury note yield dropped for the fourth straight month to 3.910%, while the two-year Treasury yield also declined for the fourth consecutive month, its longest such streak since July 2020.
Despite recent signs of labor market softening, the market is “not soft” yet, according to Roger Hallam, Vanguard Group’s global head of rates. However, he noted that a downside surprise in Friday’s jobs report could make a deeper rate cut in September more likely.
Meanwhile, traders in the federal-funds futures market are pricing in the possibility of up to one percentage point of rate cuts by the Fed this year, a move that Camporeale views as “a little too aggressive.”
“If that happens, it could signal a growth scare similar to the market reaction after July’s weaker-than-expected jobs report,” he said.
Elliott questioned the need for rate cuts, given the economy’s overall strength and the fact that asset prices are near all-time highs, with inflation remaining slightly above the Fed’s 2% target despite rate hikes.
The Fed has kept its policy rate at 5.25% to 5.5% since July 2023, a level Powell described as “restrictive,” helping to significantly reduce inflation. Powell emphasized that the cooling labor market is no longer contributing to inflation and indicated that the Fed does not favor further labor market weakening.
He also hinted that it might be time for a policy adjustment, a message that resonated with Camporeale, who has been anticipating a Fed pivot toward rate cuts.
Camporeale remains “overweight” on U.S. stocks and has recently increased his exposure to the equal-weight S&P 500 index, expecting the market rally to broaden. In the fixed income space, he favors high-yield corporate bonds, which offer additional yield.
“The probability of recession remains low,” said Camporeale, citing the resilience of the consumer and the ongoing moderation of inflation.
U.S. stock and bond markets will be closed on Monday in observance of Labor Day.
