When the Federal Reserve cut interest rates even more than expected in September, buyers in the stock market got what they wanted. There is a chance that the good jobs data coming out next week will be too much of a good thing for Wall Street.
“If you do come up with a very strong jobs number…that will definitely spook the stock market,” Komal Sri-Kumar, head of Sri-Kumar Global Strategies, Inc. in Santa Monica, California, told MarketWatch over the phone.
It comes down to what people think will happen with interest rates in the future. Strong data could make investors less likely to expect more monetary easing until the end of the year or even later. This would bring back the situation where good news about the economy is seen as bad news for stocks.
People who keep an eye on the bourse may feel very confused. After all, a lot of investors and experts were worried that the Fed was behind the times before its decision on September 18. Fears of an impending job market crash and a possible recession that could throw off corporate earnings caused separate economic growth scares in early September and late July to early August.
What’s wrong is that the Fed’s decision to cut the fed-funds rate by a huge 50 basis points instead of 25 basis points seemed to calm fears of a recession, but it also made people worry that inflation might not drop back to the central bank’s goal level of 2% soon. A measure of how much people think inflation will rise has gone up, which helped to raise short-term and especially long-term Treasury prices after the Fed’s decision.
“Bond yields should struggle to make new lows because of aggressive cuts, as we have said before,” said Andrea Cicione, head of strategy at TS Lombard, in a note on Wednesday.
“The market will be open to the idea of growth and inflation starting up again next year because of the Fed’s new reaction function,” he said. “This will lead to a higher risk premium and more rate hikes in the next cycle.”
Cicione also said that even though break-even inflation rates and estimates of the term premium in the U.S. bond market have recently gone down, all measures of possible inflation pressures are still low. This means that the risk of higher inflation is not fully priced in.
So far, Sri-Kumar said, buyers in the stock market aren’t too worried about the possibility of inflation rising again.
He said that inflation often helps businesses because they can raise prices and pass the savings on to customers. But he also said that things could change if investors start to doubt that rates will be lowered in response to strong job data or other economic data.
At first, Sri-Kumar didn’t like the Fed’s choice to start its easing cycle with a big rate cut of 50 basis points on September 18. He thinks that the Fed did this to make stock market participants happy.
In his news conference after the meeting, Fed Chair Jerome Powell tried to reassure investors that the big cut wasn’t meant to calm their fears about the economy’s future, but was instead a response to falling prices. Sri-Kumar said that the problem is that the Fed’s big first cut “let the genie out of the bottle” by making the market expect the Fed to ease policy quickly. Now, policymakers run the risk of making a lot of people very disappointed if it looks like they won’t be able to deliver.
Last week, stocks went up. On Friday, the Dow Jones Industrial Average DJIA 0.33% hit a new high. On Friday, the S&P 500 SPX -0.13% fell from the record high it reached on Thursday. The Nasdaq Composite COMP -0.39%, on the other hand, gained more than 2% for the week. On Friday, stocks went up after the Federal Reserve’s preferred inflation measure, the personal-consumption expenditures (PCE) index, showed a 2.2% year-over-year rise in August. This was a little lower than predicted.
The CME FedWatch Tool shows that on Friday, buyers in Fed-funds futures priced in a 55% chance of another 50 basis-point rate cut when the central bank meets in November, compared to a 45% chance of a 25 basis-point move. As of now, most of them think that rates will go down by 75 basis points by the end of the year. The Fed is also scheduled to meet in December.
Powell made it clear in his speech in Jackson Hole, Wyoming, at the end of August that the main goal is to keep the job market from getting worse. This is because the other part of the central bank’s job is to keep prices stable, and inflation is now heading back towards 2%.
For sure, the job market has begun to slow down. In the three months from June to August, the U.S. economy gained the fewest new jobs since the pandemic. And hiring isn’t likely to speed up any time soon.
According to a study by The Wall Street Journal, economists generally think that Friday’s monthly jobs report will show that nonfarm payrolls increased by 144,000 in September. This comes after an increase of only 142,000 the previous month and an increase of only 89,000 in July. It was thought that the jobless rate would stay at 4.2% in September. Before setting its policy for November, the Fed will have time to look over another month’s worth of job figures. 6-7 meeting, and job data for October is coming on November 1.
Investors might not put too much stock in Friday’s strong jobs report. Recent changes to benchmarks have made people less confident in the data. At the same time, surveys of hiring demand are getting worse, and consumer confidence polls show that households are beginning to feel the effects of an economy that is slowing down, wrote James Knightley, an economist at ING.
“If payrolls rise by 75,000 or less and unemployment rises to 4.3% or 4.4%, the market will likely price in the possibility of faster monetary policy easing. Keep in mind that the Fed thinks unemployment will end the year at 4.4%,” he wrote.
Even if the number was much lower than expected, it would still probably be seen as bad news for the markets.
Tom Hainlin, senior investment strategist at U.S. Wealth Management, said over the phone, “We still think it’s mostly the job market that’s the main issue.” “A really weak September jobs report would be a bad news, bad news kind of release if the jobs report softened in a lot of important ways.”
Besides the big event on Friday, other information may also make a difference. People think that Powell and his team care about job openings, so investors will pay attention to the JOLTS report, which is the monthly study of job openings and labour turnover for August. The Institute for Supply Management’s closely watched factory index will also be released on Tuesday. Market drops were partly caused by weak readings over the last two months.
Powell is also going to talk at an economics conference on Monday morning, which is the first event of the week.
To be honest, though, the best result in the short run might be a report that doesn’t go too far either way.
In a Friday note, Interactive Brokers economist Jose Torres summed it up: “A big miss could definitely change the story in markets of an upcoming downturn, but a big gain could push rate cuts further out on the curve.” “A number close to projections is best for bullish investors because it won’t change their current expectations that monetary policy will ease.”
