Equities may face hurdles if data undermines hopes for a rate cut in June, warns a strategist.

With Friday bringing the release of the jobs report, anticipation is palpable in the stock market, which has seen a downturn this week as investors weigh the possibility of Federal Reserve rate cuts later in the year.

Analysts surveyed by the Wall Street Journal anticipate a rise of 200,000 in nonfarm payrolls for March, with the unemployment rate expected to drop from 3.9% to 3.8%. Growth in hourly wages is forecasted to slow to a year-over-year rate of 4.1% from February’s 4.3%.

Tom Essaye, founder of Sevens Report Research, noted that the market’s mood ahead of the April employment report is unusual. While a jobs figure that is either “too hot” or “too cold” typically triggers a market sell-off, the greater concern this Friday is a stronger-than-expected reading.

Investors fear that if the employment report is overly positive, the Fed might postpone rate cuts from June to later in the summer or even late 2024. This sentiment was echoed by Minneapolis Fed President Neel Kashkari, who suggested the possibility of no rate cuts if inflation remains stable.

The market had entered 2024 expecting multiple rate cuts by the Fed, but expectations have since been tempered. Despite this, stocks rallied to record highs in the first quarter, with the S&P 500 posting a gain of around 10%.

Fed-funds futures on Thursday implied a 40.7% chance that policymakers would keep the key rate unchanged at the June meeting, according to the CME FedWatch Tool.

Especially concerning for Essaye is the prospect of a “too hot” figure, which could push Treasury yields higher and cause a drop of 1% or more in the S&P 500. Conversely, a “too cold” figure, such as a negligible rise in payrolls, could spark concerns about economic health but might also lead to a short-term positive market reaction as Treasury yields retreat.

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