Labor Market’s Impact on Stocks and Bonds This Week

U.S. stocks and bond investors are gearing up for a pivotal employment report this week as they return from the Labor Day weekend, marking the start of September trading.

Scheduled for release on Friday, the U.S. jobs report is expected to have a significant impact on the markets, according to Victoria Fernandez, chief market strategist at Crossmark Global Investments. She emphasized that the data on August’s job growth and unemployment rate could influence both stocks and bonds.

In early August, the release of July’s employment figures, which fell short of expectations, shook the market, with the unemployment rate rising to 4.3%. However, U.S. stocks have since rebounded, with the Dow Jones Industrial Average hitting a new record high on Friday and the S&P 500 closing just 0.3% below its peak from July 16.

“The overall economy still appears strong,” said Bob Elliott, co-founder and CEO of Unlimited Funds, though he noted uncertainty remains about whether the economy will experience a “no landing,” soft landing, or hard landing.

The labor market is under close scrutiny following Federal Reserve Chair Jerome Powell’s August 23 speech at Jackson Hole, where he pointed out that it has “cooled considerably” and that risks to employment have increased. With inflation significantly down from its 2022 peak, Powell hinted that interest rate cuts could be on the horizon.

Friday’s jobs report could be a key factor in determining whether the Fed opts for a quarter-point or half-point rate cut at its September meeting, according to Phil Camporeale, a portfolio manager at J.P. Morgan Asset Management. He expects the August employment data to show improvement, possibly leading the Fed to start cutting rates gradually. A deeper cut would indicate heightened concern about the labor market and the broader economy.

Barclays analysts expect the unemployment rate to have dropped to 4.2% in August, partially reversing July’s spike, which was partly due to temporary unemployment caused by Hurricane Beryl. They also anticipate stronger job growth compared to July.

A strong jobs report could push Treasury bond yields higher and trigger a stock market rally, according to Camporeale.

On Friday, all three major U.S. stock indexes—the Dow, S&P 500, and Nasdaq Composite—closed higher as investors assessed an inflation report that largely met expectations. The Dow and S&P 500 both posted gains for the fourth consecutive month in August.

In the bond market, Treasury yields fell in August as investors anticipated potential rate cuts by the Fed. The 10-year Treasury note yield declined for the fourth straight month to 3.910%, while the two-year Treasury yield also dropped for the fourth consecutive month, marking its longest such streak since July 2020.

Despite signs of labor market softening, the market is “not soft” yet, according to Roger Hallam, global head of rates at Vanguard Group. However, he noted that a weaker-than-expected jobs report on Friday could make a deeper rate cut in September more likely.

Meanwhile, traders in the federal-funds futures market are pricing in up to a one-percentage-point rate cut by the Fed this year, a move that Camporeale considers “a bit too aggressive.”

“If that happens, it could signal a growth scare similar to the market’s reaction after July’s unexpectedly weak jobs report,” he said.

Elliott questioned the necessity of rate cuts, given the economy’s overall strength and the fact that asset prices are near all-time highs, with inflation remaining slightly above the Fed’s 2% target despite previous rate hikes.

The Fed has kept its policy rate at 5.25% to 5.5% since July 2023, a level Powell described as “restrictive,” which has significantly helped to reduce inflation. Powell emphasized that the cooling labor market is no longer contributing to inflation and indicated that the Fed does not want to see further labor market weakening.

He also hinted at a potential policy shift, a message that resonated with Camporeale, who has been anticipating a Fed pivot toward rate cuts.

Camporeale remains “overweight” on U.S. stocks and has recently increased his exposure to the equal-weight S&P 500 index, expecting the market rally to broaden. In fixed income, he favors high-yield corporate bonds, which offer additional returns.

“The probability of recession remains low,” said Camporeale, highlighting the resilience of consumer spending and the continued moderation of inflation.

U.S. stock and bond markets will be closed on Monday in observance of Labor Day.