Today’s US non-farm payroll report is crucial for all market participants, as it could determine the size of Fed’s expected rate cut this month. Currently, fed fund futures are pricing in 43/57% chance of a 25/50 bps reduction. Market reaction to NFP will also likely set the trading tone for the remainder of the quarter.
Economists expect job growth of 163k in August, with the unemployment rate forecasted to tick down from 4.3% to 4.2%. Average hourly earnings are projected to increase by 0.3% mom, indicating solid wage growth.
Recent economic data offers a mixed outlook. ISM Manufacturing Employment rose to 46.0 from 43.4, but the ISM Services Employment fell to 50.2 from 51.1. Meanwhile, ADP Employment report showed a disappointing 99k new jobs, down from July’s 111k. Initial unemployment claims averaged 230k over four weeks, down from last month’s 240k.
A key data point to watch will be the unemployment rate. Last month’s unexpected rise to 4.3% triggered the “Sahm Rule,” a reliable recession indicator. If the unemployment rate doesn’t fall as expected, or worse, increases further, it could signal deeper labor market troubles. This scenario might prompt Fed to take pre-emptive action with a 50 bps rate cut at the upcoming FOMC meeting. Yet, markets’ bearish reaction could overwhelm Fed cut optimism.
The stock markets’ reaction to NFP today is worth high attention. S&P 500 top at 5651.37, just ahead of 5669.67 historical high. On the downside, decisive break of 55 D EMA (now at 5475.02) will argue that rebound from 5119.26 has completed. Corrective pattern from 5669.67 should have then started the third leg. In this case, deeper fall would be seen to wards 5119.26 support again.
But of course, strong bounce from 55 D EMA would set the stage for breaking through 5669.67 to resume the long term up trend, sooner rather than later.
