For stock markets, a big rise in the unemployment rate or swoon in jobs created would inevitably increase fears of recession ahead, just like it did last month, even though that would also likely shift the dial towards a 50-basis point (bp) cut in Fed rates on Sept. 18.
The recent re-emergence of a negative correlation between stocks and Treasury bonds may well be reinforced, insulating many mixed asset portfolios, such as 60/40 equity/bond formulations.
Nerves in advance have S&P500 stock futures down almost 1% before the bell on Friday as the index heads for its worst week since April. The “fear index”, or VIX volatility gauge, nudged back above 22.
Rallying treasuries, however, have seen the two-year yield fall to 3.70% for the first time since May last year. Ten-year yields also fell, leaving the 2-to-10-year yield curve on a knife edge and inverted to the tune of just 1 bp.
The dollar slipped back to late August levels.
If the consensus forecast proves correct of course, it will likely calm the horses.
And for the record, markets expect payroll growth to have picked up a notch to 160,000 last month and the unemployment rate to have fallen back a tenth of percentage point to 4.2%.
The jobless rate has been in focus ever since it triggered the so-called “Sahm rule” last month on the speed at which a rise in rates suggests recession over the year ahead.
Even though the author of the rule – ex-Fed economist Claudia Sahm – downplayed the significance of the trigger this time around, it will remain a red flag unless the rate recedes in August as expected.
As to Fed thinking, futures now price the chance of a 50 bp rate cut this month, as opposed to the baked-in quarter-point point move, as just shy of 50%. But there’s a hefty 111 bps of easing seen to the end of year and 230 bps over the next 12 months.
First to react to the employment report will be two of the Fed’s big hitters – Fed Board Governor Christopher Waller and New York Fed President John Williams. And then Fed policymakers head to their traditional blackout period before the next meeting.
On Thursday, U.S. Treasury Secretary and former Fed chair Janet Yellen said the U.S. still has a “good healthy labor market” even if the pace of job creation has slowed.
The Fed has already clearly signalled its intent to start easing this month and has publicly shifted its focus away from waning inflation to the state of the jobs market, the second of its two mandates.
With U.S. crude oil prices back below $70 per barrel and down more than 20% year-on-year, inflation pressures are dissipating further.
