With the recent Personal Consumption Expenditures Price Index (PCE) in the rearview mirror, Friday’s jobs report is the next big test for the all-time highs of stocks and fixed income ETFs.
Earlier this month, the Federal Reserve’s preferred inflation measure indicated that price increases are easing toward the Fed’s 2% target. That shifts more attention to the central bank’s other important goal: maintaining maximum employment.
Speaking at the annual meeting of the National Association for Business Economics on Monday, Fed Chairman Jerome Powell noted that the labor market remains in “solid shape” and pointed out that the Fed is cutting rates in part to maintain that strength. However, there are signs that the labor market is slowing.
Unemployment has risen steadily through 2024 and now stands at 4.2%, the highest in almost three years. Job creation has also weakened, with two of the smallest monthly job gains recorded this year, and July vacancies reaching their lowest level since January 2021.
As this week’s main jobs report approaches, the main concern is the pace at which the labor market is slowing.
The U.S. Nonfarm Payroll Monthly Jobs Report will be released Friday at 8:30 a.m. Eastern Time by the Bureau of Labor Statistics (BLS).
Why Investors Will Be Watching Friday’s Jobs Report
Investors will be closely watching Friday’s U.S. nonfarm payrolls report as it provides crucial insights into the labor market, which has a direct impact on Federal Reserve policy. The report includes data on job creation, unemployment rate and wage growth, which are key indicators of economic health.
If the labor market grows faster than expected, it could cast doubt on the size and frequency of upcoming rate cuts as the Fed looks to prevent the economy from overheating. Conversely, weaker-than-expected jobs data could prompt the Fed to consider further or deeper cuts, which could boost markets, especially bond prices.
In addition, the wage growth data is important because higher wages can fuel inflation by increasing consumer spending, raising additional concerns that inflation could continue to be higher than expected.
Jobs Report Outlook for Equity and Fixed Income ETFs
Stock and bond markets may react differently to Friday’s jobs report depending on whether the unemployment rate is higher or lower than expected.
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If unemployment is higher than expected: This would be a signal of a weakening labor market, possibly indicating an economic slowdown. For stocks, especially cyclical or growth-oriented sector ETFs like the Consumer Discretionary Select Sector SPDR Fund ETF (XLY) and the Invesco QQQ Trust ETF (QQQ)This could provoke a negative reaction respectively as concerns about reduced consumer spending and economic activity grow. However, price-sensitive ETFs such as the iShares 20+ Year Government Bond ETF (TLT) Rates could respond positively as a weaker labor market could cause the Federal Reserve to pause or cut rates sooner, causing rates to fall and bond prices to rise.
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If unemployment is lower than expected: A stronger-than-expected labor market signals robust economic growth, which would boost investor confidence in equities, especially in sectors such as consumer discretionary and industrial. However, bond prices could fall as investors expect the Fed could maintain or raise rates to control inflation, causing interest rates to rise.
In summary, stock prices generally respond favorably to stable job growth, while the bond market closely monitors the implications for Fed policy on interest rates, which have an inverse relationship with bond prices.
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