(Reuters) – A look at the day ahead in U.S. and global markets by Mike Dolan
Friday looks set to be a concentrated version of what markets have been surfing all year: what’s the fine balance for the U.S. economy to both avoid recession and keep interest rates falling at the same time.
After a flurry of labor market and business updates all week, the August employment report is now decisive, setting the tone for both this month’s Federal Reserve meeting and the holy grail of a “soft landing” for the economy.
With one exception, previous polls show that the labor market is indeed slowing down. Wage growth in the private sector was well below expectations last month, layoffs are increasing and the number of vacancies is decreasing. Only the declining weekly unemployment claims – as shown by the most recent figures – suggest otherwise.
For stock markets, a big rise in unemployment or a drop in jobs created would inevitably raise fears of a coming recession, as it did last month, even though that would also likely shift the course towards a 50% interest rate cut basis points (bp). Fed rate on September 18.
The recent reemergence of a negative correlation between equities and government bonds could be reinforced, isolating many mixed asset portfolios such as 60/40 equity/bond formulations.
Advance nerves are sending stock futures down nearly 1% before the bell on Friday, with the index heading for its worst week since April. The ‘fear index’, or volatility meter, rose above 22 again.
However, rising government bond yields have seen two-year yields fall to 3.70% for the first time since May last year. Ten-year yields also fell, bringing the 2-10 year yield curve to a razor’s edge, inverting to a level of just 1 bp.
The dollar fell back to its level at the end of August.
If the consensus forecast turns out to be correct, it will likely calm the horses down.
And to be clear, markets expect wage growth to have accelerated last month to 160,000 and the unemployment rate to have fallen by a tenth of a percentage point to 4.2%.
The unemployment rate has been in the spotlight since last month’s introduction of the so-called ‘Sahm rule’, on the speed at which a rise in interest rates signals a recession for the coming year.
Even though the author of the rule – ex-Fed economist Claudia Sahm – downplayed the significance of the trigger this time, it will remain a warning sign unless yields pull back in August as expected.
On the Fed view, futures now price the probability of a 50bp rate cut this month, as opposed to the baked-in quarter-point move, at just 50%. But there is a significant easing of 111 basis points through the end of the year and 230 basis points over the next twelve months.
The first to respond to the employment report will be two of the Fed’s big players: Fed Governor Christopher Waller and New York Fed President John Williams. And then Fed policymakers go into their traditional blackout period before the next meeting.
On Thursday, US Treasury Secretary and former Fed Chair Janet Yellen said the US still has a “good, healthy labor market” even as the pace of job creation has slowed.
The Fed has already signaled clearly that it wants to start easing this month and has publicly shifted its focus from declining inflation to the state of the labor market, the second of its two mandates.
With oil prices back below $70 per barrel and down more than 20% year-on-year, inflationary pressures are easing further.
TECH IN FOCUS
Among companies, market fear is also focused on high chipmaker stocks, and overnight news remained troubling on that front.
Broadcom (NASDAQ:) on Thursday expects fourth-quarter revenue slightly below Wall Street expectations after slow spending in the broadband segment. Despite a surge in orders for its artificial intelligence chips, shares fell more than 7% after hours.
However, Qualcomm (NASDAQ:) has explored the possibility of acquiring parts of Intel’s (NASDAQ:) design business to boost the company’s product portfolio, according to two sources familiar with the matter.
Next on the horizon for the tech sector is Apple’s (NASDAQ:) expected release next week of its latest iPhone, a model expected to include new AI capabilities.
In politics, markets are also preparing for the first televised debate next Tuesday between American Republican candidate Donald Trump and his Democratic rival Vice President Kamala Harris.
Both candidates laid out more economic plans this week, with Harris proposing a lower capital gains tax than the current administration and Trump proposing a corporate tax rate of just 15%.
Around the world, stock markets in Europe and Asia generally lagged payrolls.
A big gainer in Europe was Raiffeisen Bank, which fell 7% after a Russian court froze shares in the lender’s Russian unit, which wanted to spin off the company.
Key developments that should give more direction to US markets later on Friday:
* August US Employment Report; Canada August Employment Report
* Federal Reserve Board Governor Christopher Waller and New York Fed President John Williams both speak after the payroll report
(By Mike Dolan, Editing by Sharon Singleton; mike.dolan@thomsonreuters.com)
