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What does Friday’s jobs report mean for markets? ‘Too hot’ could cause stocks to fall, market expert says

Friday’s monthly U.S. jobs report again hit the stock market as Federal Reserve Chairman Jerome Powell last week reaffirmed his plans to keep raising interest rates to keep inflation down despite risks of a recession. , said Tom Essay, a former Merrill Lynch trader. Founder of the newsletter Sevens Report.

The Labor Department’s monthly employment report on Friday tracked public and private sector employment and showed the U.S. economy added 318,000 jobs in August, according to a survey of economists. It is expected to be far less than the 528,000 jobs created in July. By The Wall Street Journal. The unemployment rate is he stable at 3.5% and average hourly earnings are estimated to rise 0.4% following his 0.5% rise in the previous month.

“The labor market needs to show signs that it is on its way back to a state of relative equilibrium where the number of job seekers and vacancies are about the same. The Fed will continue to be more hawkish for longer, and that’s not good for stocks,” Essay wrote in a report Thursday.

look: US looks to add 318,000 jobs this month, but watch out for surprises in August

‘too hot’

According to Essaye, if employment results “overheat”, such as nonfarm payrolls adding more than 350,000 jobs a month and the unemployment rate falling below 3.5%, stocks will plummet and the previous “less violent repeat” ” may be. On Friday, the market will price higher interest rates longer.

US stocks plunged last Friday along with the Dow Jones Industrial Average DJIA.
+0.46%
Over 1,000 points in the worst daily percentage drop in three months after Powell said in his Jackson Hole speech that the central bank would continue its fight to return annual inflation to its 2% target fell. end”.

“A number as strong as this underscores that the labor market remains imbalanced, and the Fed will continue to focus on slowing demand as interest rates rise,” Essay said. “In practice, this increases the chances of the ‘Terminal’ Fed Fund rate exceeding 4%, possibly crushing hopes of a rate cut in 2023.”

The spread of the 10-year and 2-year treasury yield curves is highly likely to rise in 2-year yields and 10-year treasuries due to the prospect of rising interest rates, but it is unlikely that they will rise. is doing.

Two-year Treasury yield hits 15-year high TMUBMUSD02Y
3.519%
10-Year Treasury Yield TMUBMUSD10Y at 3.528% on Thursday,
3.263%
It rose to 3.266%, the highest level since late June.

look: ‘Prepare for an epic finale’: Jeremy Grantham warns of ‘tragedy’ looming as ‘superbubble’ could burst

‘Just right’

But if job growth falls into the zero to 300,000 range while the unemployment rate rises above 3.7%, the stock market could expect a modest rally, given the decline in stock prices over the past five days, according to Essaye. There is a nature.

US stocks were mixed in late trading on Thursday. Dow Jones Industrial Average DJIA,
+0.46%
40 points, up 0.1%. S&P 500 SPX,
+0.30%
Nasdaq Composite COMP fell 0.1%,
-0.26%
It was 0.8% cheaper. All three major indices fell for his fourth consecutive fall.

“The ‘Just Right’ jobs report still doesn’t bring back the idea of ​​an imminent Fed turnaround, so we wouldn’t expect a sharp rally in stocks,” Essay said. “[It]will not make the Fed more hawkish and keep us hopeful that the Fed can cut rates in 2023.”

‘too cold’

In the worst-case scenario, when the August jobs report turns negative and the unemployment rate surges, stocks could surge on the “bad is good” mentality, but the Fed could turn from tightening to “soft”. It never pivots as ‘the numbers don’t change’. He doesn’t need to change the Fed’s calculations for the next few meetings. “We’re still holding 50-75 bps in September,” so we’re not going to chase that uptick,” he said.

look: What history tells us about September and the stock market after the summer rally

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