If current trends continue, a strong job market might result in a weak stock market. This Friday’s release of the nonfarm payrolls report will be a critical moment for Wall Street, which has been anxious all week due to the unexpectedly strong labor market.
There is concern that if the tight labor market persists, the Federal Reserve may maintain high interest rates, potentially endangering the U.S. economy during a crucial period.
According to economists surveyed by Dow Jones, it is expected that September will witness the addition of 170,000 new jobs, but any number significantly higher than that could have a negative impact on the already struggling market.
Quincy Krosby, the chief global strategist at LPL Financial, highlights that the market interprets every aspect of the report in terms of its implications for the Federal Reserve. The market is clearly hoping for a headline figure that confirms a labor market that, while slowing down, remains resilient.
Market Reactions
At the beginning of the week, the Labor Department released unexpected data showing a significant increase in job openings in August, reaching their highest point since spring and reversing the previous trend of decline. Federal Reserve officials closely monitor this metric as an indicator of how tight the labor market is.
Following the release of this report, known as the Job Openings and Labor Turnover Survey, stock prices fell sharply on Tuesday, raising concerns that another downward slide might occur if Friday’s job count also turns out to be strong.
In addition to the stock market reaction, Treasury yields surged to a 16-year high, which could suggest concerns about the possibility of the Federal Reserve raising interest rates.
UBS chief economist Jonathan Pingle said that if we witness a series of strong economic data points, there’s a strong possibility of the Federal Open Market Committee (FOMC), the central bank’s rate-setting body, reconsidering a rate hike in November.
Presently, the financial markets are not anticipating a move by the Federal Reserve at the conclusion of its next meeting on November 1st. According to the FedWatch Tool by CME Group, as of Thursday afternoon, the probability of a rate hike stands at just 19.6%. Even for December, the likelihood is relatively low at 32.6%.
However, this outlook could shift if there is a strong nonfarm payrolls figure, which is the expectation of some individuals within the financial industry.
Expectations for the Labor Market Report
Goldman Sachs, for instance, predicts that job growth will reach 200,000, while Citigroup is even more optimistic, forecasting 240,000 new jobs. On Wednesday, ADP reported an increase of only 89,000 in private payrolls for September. It’s worth noting that ADP’s report often significantly differs from the official count provided by the Labor Department.
Moreover, weekly jobless claims have been consistently decreasing in recent weeks, suggesting that employers are showing reluctance to reduce their workforce.
“Bottom line, the first response on the part of an employer when the economic visibility gets more cloudy is to hire less,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “We’ll most likely see more evidence of that [Friday], but employers in the aggregate are not yet looking to trim the size of the workforce, as evidenced by a still-low level of initial claims.”
The financial markets will also closely examine two key factors, worker wages and the labor force participation rate.
Regarding wages, the anticipation is a 0.3% rise in average hourly earnings, a figure that had only increased by 0.1% in August. Additionally, the unemployment rate, which is impacted by labor force participation, is expected to slightly decrease to 3.7%.
Conclusion
The strong job market has raised concerns for Wall Street and the Federal Reserve. Anticipation surrounds the nonfarm payrolls report, with economists expecting 170,000 new jobs in September. Market reactions and unexpected job openings highlight the uncertainty. A strong report could prompt the Fed to reconsider a rate hike, impacting financial markets.
