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Bank of America warns that a strong August jobs report on Friday could send the stock market lower.
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A high non-farm employment figure could revise expectations for rate cuts, affecting investor sentiment.
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Economists predict 162,000 jobs will be added in August, but some even expect 225,000.
According to Bank of America, the biggest risk to the stock market this week is a stronger-than-expected August jobs report.
The bank highlighted the risk in a note on Monday, saying an overly high employment index would affect the number of expected rate cuts this year.
“Stocks appear more excited about the cuts than concerned about a potential recession, judging by their return to near-highs and the outperformance of small caps and equal-weight S&P,” said Ohsung Kwon, a strategist at Bank of America.
He added: “If that is true, then the biggest risk for equities this week is a hot NFP that pushes short-term rates higher.”
The August non-farm payrolls report is set to be released Friday morning. Economists expect the economy to have added 162,000 jobs last month, which, if accurate, would lower the unemployment rate to 4.2% from 4.3%.
Bank of America economists expect only two rate cuts of 25 basis points this year, while the market is already pricing in recession-sized rate cuts of 100 basis points, according to the CME FedWatch Tool.
If the US economy shows a strong recovery after July’s weak jobs report, it could change market sentiment and prove that investors have too much confidence in the Fed’s rate cut.
According to the note, this would likely put downward pressure on the stock market as Kwon advised investors to hedge downside risk with October put spreads on the S&P 500.
Recent signs of a resilient economy include revised second-quarter GDP growth from 2.8% to 3.0%, and solid personal spending data, which rose 0.5% month-on-month in July.
“The economy continues to disprove skeptics. Growth has certainly slowed compared to last year, but it has been gradual,” Kwon said.
One Wall Street strategist expecting a strong jobs report on Friday is Ed Yardeni of Yardeni Research.
Yardeni said in a note to clients Monday that he expects 200,000 to 225,000 jobs were added to the economy last month.
If true, it would beat economists’ forecasts and be consistent with the strong May and June jobs reports, reinforcing the idea that the Fed doesn’t need to cut rates that much.
“It is highly unlikely that the Fed will need to cut the federal funds rate as quickly and as much as was necessary during previous monetary easing cycles, when financial crises led to credit crunches and recessions,” Yardeni said.
While Yardeni’s optimistic outlook would be good news for the economy, it could also be a headwind for stock prices in the near term.
Read the original article on Business Insider
