Key jobs report in the coming week could lead to the next big market move

With Jackson Hole in the rearview mirror, the August jobs report could be the next driver for markets.

Shares have gained over the past week, hitting new highs again on Friday after a speech by Federal Reserve Chairman Jerome Powell. The president acknowledged that Fed officials expect to cut their bond buying program by $ 120 billion per month this year, a first step towards reversing the ease policy.

Powell was speaking at the Kansas City Fed’s annual symposium in Jackson Hole, Wyo., Held virtually this year. He said the Fed had seen enough progress on inflation, but the labor market had not yet improved enough to initiate the slowdown. Importantly, he also pointed out that the gradual reduction in the bond program does not mean that the Fed will automatically switch to a hike in interest rates.

“Powell has made it clear that the Fed is not ready to raise interest rates anytime soon. The market seems relieved by this.… With some economic data already slowing, I think rate hikes are slowing down. Interest is far, far away, and investors are happy about it, ”said Michael Arone, chief investment strategist for the US SPDR business at State Street Global Advisors.

Arone said the Fed had so far avoided a “taper tantrum,” similar to the market liquidation in 2013 when the Fed announced it was rolling back quantitative easing. Powell’s speech was widely expected to clarify the Fed’s stance on its monthly bond purchases of $ 120 billion, after a number of Fed officials called for the start of a slowdown.

Employment is the focal point

Now, the market’s attention is shifting even more fiercely to employment data, with the August Jobs Report being released on Friday.

“Of course the market is going to react,” said Jim Caron, head of macro strategies for global fixed income at Morgan Stanley Investment Management. “I think that’s important. I think the problem they’re going to have is that unemployment benefits don’t really run out until early September. It’s really only when you get the job number d ‘October you get a more free preview of September. “

The dollar index sank after Powell’s speech on Friday morning, as stocks hit new highs and Treasury yields fell. Other data for the coming week includes consumer confidence on Tuesday and Wednesday, the release of manufacturing data from the Institute for Supply Management and private sector wage data from ADP, a sort of snapshot of the Friday’s government employment report.

“I wouldn’t be surprised to see a follow-up on Monday and Tuesday, but before ADP on Wednesday, I would look for a positional adjustment, which means weaker stocks and bonds and a stronger dollar ahead of jobs data “said Marc Chandler. , Chief Market Strategist at Bannockburn Global Forex.

He said Powell was accommodating, as expected, while stressing that the reduction was on the way. But the key to the markets was that he stressed that the end of the program does not mean “tightening” or rate hikes. The 10-year Treasury yield had risen above 1.35% this week, but fell to 1.31% after Powell intervened on Friday.

“The market will become cautious again ahead of the jobs data. Then it’s a new world in September. You have to wait until after the jobs data to see if these moves have any sustaining power. rumor has it, sell the fact ‘move,’ Chandler said.

Some market pros were expecting an announcement about the Fed’s withdrawal at its September meeting, but that view has now mostly changed to an announcement in November or December. “Due to the uncertainty in the Delta, I think it will take more than the next jobs report,” said Diane Swonk, chief economist at Grant Thornton. “The disruption to jobs in particular occurs if schools have to close again.”

Economists polled by Dow Jones predict that 750,000 jobs were created in August and that the unemployment rate fell to 5.2%. In July, the economy created 943,000 jobs and unemployment slipped to 5.4%. Education was a big contributor in July, with 261,000 jobs added in public schools and private education.

“It doesn’t have to be a spectacular number to meet their needs,” Swonk said of the August report. “You need a solid number of jobs, something north of half a million… I think we’re going to be close to that. They’ll want to see employment in September as well.”

Market risks

Arone, of State Street, said the Fed’s discussion of the cut would be a priority in the markets, just as the next earnings season unfolds.

“It will be interesting as the Fed starts to let go,” he said. “At the moment, the bullish scenario continues to be reasonably strong, but the markets are not moving up directly. If I had to focus on a specific risk, I would keep an eye on the third quarter results and, more importantly, the leaders are talking about next year. “

Arone said strong earnings were the main driver of market gains, helping investors ignore concerns about the spread of the delta variant of Covid, the US withdrawal from Afghanistan and the dysfunction in Washington.

“The market may have ignored all of this noise and rally,” he said, adding that it would be ironic if it was profits that caused a sell off and not a change in Fed policy or something else. .

He said the market could become choppy in September and October, a seasonally low time of year for stocks.

“We got a glimpse of that this quarter, with big tech – where the numbers were beating, but they suggested future quarters would be slower growth,” Arone said. “Investors didn’t like it, and I think it gave us a glimpse of what happens if it spreads beyond the tech sector to other sectors.”

There are a few wins over the coming week including Zoom Video Monday, Campbell Soup Wednesday, and Hewlett Packard and Broadcom Thursday.

Watch Ida

The oil and gas industry is closely monitoring the approach of Hurricane Ida, which is heading straight for Louisiana. Oil, gasoline and natural gas all recovered on Friday, as energy companies shut down production in the Gulf of Mexico ahead of the storm. Louisiana is also home to a number of refineries.

Calendar for the upcoming week

On Monday

Earnings: Cloudera, Video zoom

10:00 a.m. Pending door-to-door sales

Tuesday

Earnings: Designer brands, NetEase, PVH, Crowdstrike, Ambarella

9:00 a.m. FHFA Housing Price Index

9:00 am S&P CoreLogic Case-Shiller House Prices

9:45 am Chicago PMI

10:00 am Consumer confidence

Wednesday

Earnings: Campbell Soup, Chewy, Brown-Forman, Vera Bradley, Nutanix, Smith and Wesson, Asana, ChargePoint

Monthly vehicle sales

7:00 a.m. Weekly mortgage applications

8:15 a.m. ADP employment report

9.45 a.m. Markit manufacturing PMI

10:00 am ISM manufacturing

10:00 am Construction expenses

12:00 p.m. Atlanta Fed President Raphael Bostic

Thursday

Earnings: Hewlett Packard Enterprise, Broadcom, Lands’ End, American Eagle Outfitters, DocuSign, Ciena, John Wiley, Signet Jewelers, Hormel, Cooper Cos

7:30 a.m. Job cuts at Challenger

8:30 am Unemployment claims

8:30 am Productivity and costs

8:30 am International trade

10:00 Factory orders

1:00 p.m. Raphael Bostic, President of the Atlanta Fed

Friday

8:30 am Employment report

9.45 a.m. Markit Services PMI

10:00 am ISM Services