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Dow Jones NewsSep 4, 6:18 PM UTC
MW It will take a doozy of a jobs report to derail investor expectations for a September rate cut
By William Watts
Markets are well positioned for more softness in labor data, but appear less prepared for a beat: strategists
A hot jobs report would deliver more of a jolt to the bond market than further evidence of labor weakness, strategists say.
Investors are gearing up for what was always going to be the week's main event: Friday's August jobs report. And as is often the case when anticipation builds, the likely market reaction to a beat or a miss isn't perceived as equal.
"We think markets are already well positioned for continuing softness in labor data. ... In contrast, there is very little set-up for a beat," said Blake Gwinn and Izaac Brook, rates strategists at RBC Capital Markets, in a Thursday note.
Fed-funds futures traders have priced in a 97.6% probability the Federal Reserve will cut its key interest rate by 25 basis points, or a quarter of a percentage point, from its current range of 4.25% to 4.5% on Sept. 17, and have penciled in a second cut by year-end.
Economists expect a small 75,000 increase in new jobs in the August report, according to a Wall Street Journal survey, with the unemployment rate rising to a nearly four-year high of 4.3% from a July read of 4.2%.
Read: A weak August jobs report will tee up the Fed to reduce interest rates. A worse one may spur even more cuts.
Short-term Treasury yields, which move opposite to prices, have fallen sharply since the end of July on rising rate-cut expectations. Meanwhile, the yield curve has steepened on concerns President Trump's efforts to reshape the Fed will destroy its independence and foster inflation. That should serve to dampen the reaction to a "modestly soft" jobs print, the RBC strategists wrote.
It would take significant weakness - such as a rise in the unemployment rate to 4.4% or a negative payrolls number - for fed-funds futures traders to begin pricing in a half-point cut or challenge the current pricing for an eventual bottom in the rate at 3%, they said. In contrast, a strong figure could see a bear flattening of the yield curve - in which short-term yields rise faster than those at the long end - become a "bit of a pain trade."
That said, even a much stronger-than-expected payrolls rise of, say, around 110,000 would be unlikely to see traders significantly scale back expectations for a quarter-point cut, said Krishna Guha, head of the global policy and central-bank strategy team at Evercore ISI, in a note.
"We think it would take a bigger and broad-based upside surprise with something like 140,000 to 150,000 [added to] payrolls, positive revisions to recent months and a material fall in the unemployment rate to put a cut at risk," he wrote.
Tom Essaye, founder of Sevens Report Research, argued in a Thursday note that it would take a much more robust beat to derail rate-cut expectations and sink stocks.
The best-case scenario would be a payrolls rise of around 150,000 with a stable unemployment rate and tame wage growth, which would push back on growth worries but allow the Fed to cut in September, he said.
Payrolls growth of 250,000 or more and a drop in the unemployment rate to 4% or below would likely spark a sharp selloff for stocks - potentially sending the S&P 500 SPX down 1% or more and sparking a sharp rise in the 10-year Treasury yield BX:TMUBMUSD10Y, according to Essaye.
A weak reading that sees payrolls rise by 25,000 or less and an unemployment rate of 4.4% would be a negative for stocks eventually, but could spark a near-term jump, he added.
"A number this low would be negative for the market, but in the very short term a 'bad-is-good' reaction due to rising expectations for three rate cuts in 2025 wouldn't shock me," Essaye wrote. "A bounce in the S&P 500 initially shouldn't be a total surprise, but beyond the short term this outcome would not be positive and I'd expect the S&P 500 to roll over on growth fears."
See: Fed officials struggle to explain slowing economy, adding to the sense a rate cut is coming
-William Watts
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09-04-25 1418ET
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