The markets are preparing to face the delicate test case represented by US labor market data. For today’s non-farm payrolls, expectations are +275 thousand jobs with the unemployment rate steady at 3.7% in September. “A weakness in today’s data could raise the idea that the labor market is slowing, and thus perhaps produce a new rally in equities. On the contrary, the signs of further strengthening will reinforce expectations of further monetary tightening ”, argue the IG experts.
After worst September of the last 20 years, Wall Street recovered from its annual lows this week, recovering to 5%. However, strategists preach caution warning that the strong rally by the start of the quarter does not mean the worst is behind us.
The September employment report is likely to offer important guidance to the Federal Reserve ahead of its next policy meeting in early November.
The fear that everything is still fine
The response that will come out today could offer a glimpse of the near-term direction of the markets. “The expectation is that the report will be of a goldilocks nature – not too hot and not too cold,” said Lindsey Bell, Ally’s chief markets and money strategist in recent days, believing that employment data will have to be in line or below expectations for the stock market to continue its rally.
Lo potentially worst case scenario is a strong creation of new jobs which could paradoxically frighten investors and negatively impact equities. Because? The continued good health of the US labor market would be interpreted as an assist to a Fed still aggressive on rates and therefore higher interest rates for longer.
Ironically, investors today are hoping for a monthly decline in employment, with more jobs lost in the economy each month. However, weak economic data does not necessarily mean the central bank will become less aggressive with its interest rate hike plans, as Bell points out in an interview with MarketWatch.