Balancing Act: Labor Market Strength vs. Stock Market Concerns

06.10.2023 posted by Admin

Job Market's Strength: A Threat to Wall Street

If the current trends continue, a robust job market could potentially lead to a weak stock market.

The upcoming nonfarm payrolls report, scheduled for release on Friday, is poised to be a significant trial for Wall Street. This week, there has been a prevailing sense of unease concerning the unexpectedly resilient labor market. The concern is that if the labor market remains tight, the Federal Reserve might maintain high interest rates, putting the U.S. economy in a precarious position at a crucial juncture.

According to economists surveyed by Dow Jones, it is anticipated that September will reveal the addition of approximately 170,000 new jobs. If the actual number exceeds this significantly, it could paradoxically send shockwaves through an already struggling market.

Quincy Krosby, the Chief Global Strategist at LPL Financial, points out, "The market evaluates all aspects of the report through the lens of the Fed." Clearly, the market is hopeful for a headline figure that confirms a labor market that, while slowing down, remains robust.

Earlier this week, the Labor Department released a report indicating an unexpected surge in job openings in August. This increase took job openings to their highest level since spring, reversing a recent trend of decline. Fed officials closely monitor this metric as an indicator of labor market tightness.

Following this report, stock prices took a tumble on Tuesday, raising concerns that another decline could be imminent if Friday's job count also turns out to be strong. Concurrently, Treasury yields reached a 16-year high, possibly reflecting apprehension about potential interest rate hikes by the Fed.

As UBS Chief Economist Jonathan Pingle remarked, "If we see a slew of strong data, it could bring up the possibility of a November rate hike by the Federal Open Market Committee (FOMC)." The FOMC is the body responsible for setting interest rates at the central bank.

Currently, the market perceives little likelihood of a Fed policy change at the conclusion of its next meeting on November 1. According to fed funds futures prices measured by the CME Group's FedWatch Tool as of Thursday afternoon, there is merely a 19.6% chance of a rate hike. Even for December, the probability stands at just 32.6%.

Nonetheless, this outlook could shift with a robust payroll figure, which some on Wall Street are anticipating.

Goldman Sachs, for instance, is predicting job growth of 200,000, while Citigroup has an even higher estimate of 240,000. On Wednesday, ADP reported that private payrolls increased by a modest 89,000 in September, although this report often diverges significantly from the Labor Department's official count.

Furthermore, weekly jobless claims have exhibited a declining trend over the past few weeks, suggesting that employers are hesitant to reduce their workforces. As Peter Boockvar, Chief Investment Officer at Bleakley Advisory Group, put it, "In uncertain economic times, the initial response of employers is usually to hire fewer people. We may witness more evidence of this on Friday, but as a whole, employers do not seem eager to downsize their workforces, as indicated by the consistently low level of initial claims."

Investors will also be closely scrutinizing worker wages and the labor force participation rate.

There is an expectation of a 0.3% increase in average hourly earnings, compared to a mere 0.1% rise in August. Additionally, the unemployment rate, influenced by labor force participation, is projected to dip slightly to 3.7%.
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