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A strong jobs market could have a negative impact on the stock market if current trends continue.
Friday’s nonfarm payrolls report will be a crucial test for Wall Street, as it has been concerned about the resilient labor market throughout the week. The fear is that if the tight labor market remains, it could lead to high interest rates from the Federal Reserve, potentially jeopardizing the U.S. economy at a critical time.
Economists surveyed by Dow Jones predict a net increase of 170,000 new jobs in September. Anything significantly above that could have a negative impact on the market.
“The market closely watches all components of the report with the Fed in mind,” said Quincy Krosby, chief global strategist at LPL Financial. “The market is hoping for a headline number that supports a labor market that has slowed but remains strong.”
Earlier this week, the Labor Department reported an unexpected jump in job openings in August, reaching the highest level since the spring and reversing the previous decline trend. Fed officials closely monitor this metric as an indicator of labor market tightness.
Tuesday’s report on job openings triggered concerns and led to a market decline. Treasury yields also reached a 16-year high, potentially reflecting fear of higher interest rates from the Fed.
“If we see a series of strong data points, it could lead to a possible rate hike in November for the Federal Open Market Committee,” said Jonathan Pingle, chief economist at UBS, during an interview on CNBC. The FOMC is responsible for setting interest rates.
Currently, the markets see little chance of a rate hike at the end of the next FOMC meeting on November 1. The probability of a hike is only 19.6%, according to fed funds futures prices from the CME Group’s FedWatch Tool. Even for December, the probability is just 32.6%.
However, this could change if the nonfarm payrolls report is stronger than expected, which is what some on Wall Street are anticipating.
According to Goldman Sachs, job growth of 200,000 is expected. Citigroup has an even higher prediction of 240,000. ADP reported an increase of just 89,000 private payrolls in September, but this report often differs significantly from the official count by the Labor Department.
In addition, weekly jobless claims have been decreasing recently, indicating that employers are hesitant to cut payrolls.
“When economic conditions become more uncertain, employers tend to hire less,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “We will likely see more evidence of this on Friday, but overall, employers are not currently looking to reduce their workforce, as shown by the low level of initial claims.”
Market observers will also closely monitor worker wages and the labor force participation rate.
The expected increase in average hourly earnings is 0.3%, following a 0.1% increase in August. The unemployment rate, influenced by participation, is expected to slightly decrease to 3.7%.
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