If Friday’s jobs report is ‘Too hot’ stocks could tumble

With Federal Reserve Chair Powell last week reaffirming plans to keep raising interest rates to bring down inflation despite the risk of recession, Friday’s monthly U.S. jobs report may once again carry risks for the stock market. The Labor Department’s monthly jobs report on Friday, which tracks employment across the public and private sectors, is expected to show the U.S. economy added 318,000 jobs in August, far fewer than the 528,000 jobs that were created in July, according to a survey of economists by The Wall Street Journal. The unemployment rate is seen steady at 3.5%, while the average hourly earnings are estimated to rise 0.4%, following a 0.5% rise in the previous month.  “The labor market needs to show signs that it’s on the path to returning to a state of relative balance, where job openings are roughly the same as the number of people looking for jobs—and if it does not show that, then concerns about a more hawkish-for-longer Fed will rise, and that’s not good for stocks,” wrote Essaye in a note on Thursday.   if the employment results come in “too hot” with nonfarm payrolls rising more than 350,000 for the month and the unemployment rate falling below 3.5%, stocks would drop sharply in what might be a “less-intense repeat” of last Friday, as markets price in higher interest rates for longer. Numbers this strong would underscore that the labor market remains out of balance, and that would keep the Fed focused on slowing demand via higher rates, Practically, this would increase the chances the ‘terminal’ fed funds rate moves above 4% and hopes for a rate cut in 2023 would likely be dashed.”  However, if job growth falls in a range of zero to 300,000 while the unemployment rate rises above 3.7%, the stock market may expect a modest rally given the drop in stocks over the past five days, according to Essaye.  We wouldn’t expect an explosion higher in stocks because a ‘Just Right’ jobs report still wouldn’t bring back the idea of an imminent Fed pivot,” said Essaye. “(It) would not make the Fed get more hawkish and keep alive the hope that the Fed could cut rates in 2023.”  In the worst case scenario with a negative jobs print for August and a spike in the unemployment rate, stocks may jump on a “bad is good” mindset though the Fed won’t pivot away from its monetary tightening as “a soft number won’t change the Fed’s calculus for the next several meetings — ‘we’re still getting 50-75 bps in September’, so we would not be inclined to chase that rally,” according to Essaye.