Financial markets remain unfazed by Thursday's inflation update from the Federal Reserve's preferred indicator. Instead, investors have shifted their focus to Friday's nonfarm payroll report, hoping to glean more insights into the labor market slowdown.
Economists predict that job gains in August will decrease to 170,000 from the previous month's 187,000. Should the actual number fall below this estimate, it could provide support for a soft landing and further diminish the likelihood of another Fed rate hike this year. Additionally, it may prolong the recent streak of gains in the stock market.
Labor Market Conditions Impact Stock Market
The latest data on labor market conditions have significant implications for various sectors. Recent reports indicate that job openings in July fell to a 28-month low of 8.8 million, and consumer confidence took a hit in August. Additionally, the private-sector payrolls report from ADP revealed only 177,000 jobs gained in August, lower than anticipated. As a result, fed funds futures traders have adjusted their expectations regarding further rate hikes by the Federal Reserve this year.
The reaction in the stock market has been positive, with all three major indexes surging and Treasury yields reaching their lowest levels in three weeks. Surprisingly, the economy's bad news is being treated as good news for now. The prospect of fewer rate hikes outweighs concerns about slower growth. Deutsche Bank strategists Jim Reid, Henry Allen, and others commented on this phenomenon, stating, "All eyes are now on tomorrow's U.S. jobs report." They added that their U.S. economists anticipate nonfarm payrolls to further decline to 150k, and the previous day's report from ADP supports the view of a softening labor market.
While the accuracy of ADP's private-sector payrolls report as a predictor of the official nonfarm payrolls data may be debatable, it does set the tone for Friday's official jobs figures. According to Ben Jeffery, a rates strategist at BMO Capital Markets, ADP's data is among seven "negative proxies" within the labor market that suggest a downward trend in August's nonfarm payrolls report. However, he also emphasized that even if hiring slows down as expected, it may not prevent another rate hike this year due to the resilient labor market and the Federal Reserve's messaging about not basing decisions on a single month's data.
Instead, Jeffery suggests that further evidence of the lagged influence of monetary policy would reinforce the Federal Open Market Committee's (FOMC) focus on flexibility. The FOMC aims to allow more data to guide their next steps concerning fed funds rates. In light of this, economists surveyed by The Wall Street Journal predict approximately 170,000 job gains for August. They also foresee a 0.3% rise in average hourly wages and a slight decline in the unemployment rate to 3.5%, placing it near historic lows dating back to the 1960s.
Stock Indexes Rise Following Expected July PCE Data
As of Thursday morning, the three major stock indexes - DJIA, SPX, and COMP - have all seen gains. This increase comes after the release of core readings from the July personal consumption expenditures (PCE) index, which met expectations.
Treasury Yields Remain Steady or Slightly Lower
On the other hand, Treasury yields for both 1-year (BX:TMUBMUSD01Y) and 30-year (BX:TMUBMUSD30Y) bonds have shown little change or a slight decrease. The PCE data did not have a significant impact on fixed-income investors.
It is worth mentioning that market conditions can change rapidly and have various factors influencing them. Keeping up with the latest updates and consulting trusted sources is always recommended.
