Understanding the Tension Surrounding the High-Stakes Jobs Report for Stock-Market Investors

Equities might encounter obstacles if data dampens hopes for a June rate cut, according to a strategist’s warning.

With Friday marking the release of the jobs report, there’s heightened anticipation in the stock market, which has seen a downturn this week as investors gauge the likelihood of Federal Reserve rate cuts later in the year.

Analysts surveyed by the Wall Street Journal expect nonfarm payrolls for March to increase by 200,000, with the unemployment rate predicted to decrease from 3.9% to 3.8%. Hourly wage growth is forecasted to slow to a year-over-year rate of 4.1% from February’s 4.3%.

Tom Essaye, founder of Sevens Report Research, observed an unusual market sentiment ahead of the April employment report. While typically a “too hot” or “too cold” jobs figure triggers a market sell-off, this Friday’s concern lies more with a stronger-than-anticipated reading.

Investors are worried that if the employment report shows significant strength, the Fed might postpone rate cuts from June to later in the summer or even late 2024. This sentiment was echoed by Minneapolis Fed President Neel Kashkari, who hinted at the possibility of no rate cuts if inflation remains stable.

Although the market initially anticipated multiple rate cuts by the Fed in 2024, expectations have since been tempered. Nevertheless, stocks rallied to record highs in the first quarter, with the S&P 500 posting a gain of around 10%.

According to the CME FedWatch Tool, Fed-funds futures on Thursday implied a 40.7% chance that policymakers would maintain the key rate unchanged at the June meeting.

Of particular concern to Essaye is the potential for a “too hot” figure, which could drive Treasury yields higher and lead to a drop of 1% or more in the S&P 500. Conversely, a “too cold” figure, such as a minimal increase in payrolls, could raise concerns about economic health but might also prompt a short-term positive market reaction as Treasury yields retreat.