Stocks Fall as Jobs Leave ‘Little Room for Error’: Markets Wrap

(Bloomberg) -- Stocks whipsawed ahead of US jobs data that will be key in determining the size of a Federal Reserve rate cut in September.

In a session of several twists and turns, the S&P 500 finished lower. That’s despite a rally in a handful of big techs. Treasury yields fell slightly, with traders still pricing in over 100 basis points in Fed easing this year — which implies a potential super-sized reduction. Given Jerome Powell’s recent emphasis on the labor market, many on Wall Street say Friday’s US payrolls will dictate whether the Fed cuts by 25 or 50 basis points this month.

To Steve Sosnick at Interactive Brokers, a “Goldilocks” scenario around consensus – ‘not too hot, not too cold’ – is what equity bulls require.

“The danger in really ‘bad news’ is that even if the Fed is prepared to react aggressively, it might be too late to stave off real economic weakness,” he said. “But there is a worry that if the news is ‘too good,’ the Fed might be reticent to cut rates as fast as the market has come to expect.”

In the run-up to the figures, economic data was mixed. US services expanded at a modest pace, companies added the fewest jobs since the start of 2021, while unemployment claims trailed estimates.

“After today’s mixed numbers, it’s up to tomorrow’s jobs report to give investors a clearer read on the state of the labor market,” said Chris Larkin at E*Trade from Morgan Stanley. “Markets are still trying to figure out if the economy is slowing too much, and whether the Fed is behind the curve.”

The S&P 500 fell 0.3%. The Nasdaq 100 was little changed. The Dow Jones Industrial Average dropped 0.5%. A gauge of the “Magnificent Seven” megacaps rose 1.6%. The Russell 2000 declined 0.6%. US 10-year yields slid three basis points to 3.73%. The dollar slipped.

In corporate news, Nvidia Corp. climbed, with Bank of America Corp. analysts saying the recent plunge created a buying opportunity. Tesla Inc. jumped on plans to launch the driver assistant in China and Europe. In late hours, Broadcom Inc. slumped on a tepid forecast.

Following a disappointing jobs report last month, it’s no wonder that investors are “skittish” ahead of Friday’s data, according to Bret Kenwell at eToro.

“While the odds currently favor a 25 basis-point cut at the Fed’s September meeting, a woefully disappointing jobs report could shift those odds to favor a 50 basis-point cut,” he said. “If the Fed feels forced to go right to a 50 basis-point cut, it may suggest there’s a bigger worry about the jobs market than previously acknowledged.”

Kenwell says that ideally, we should see a “better-than-feared” report on Friday, showcasing a labor market that has softened a bit — but isn’t weak — and allows the Fed to usher in a series of 25 basis-point rate cuts.

To Andrew Brenner at NatAlliance Securities, if the economy shows strength in nonfarm payrolls, equities should do better initially — but if rates “get slaughtered,” that won’t be good. Conversely, if rates rally because of a weak number, that won’t be good for stocks either.

“So we are in a tails we lose, heads we lose,” Brenner concluded.

The jobs report is expected to show payrolls increased by about 165,000, based on the median estimate in a Bloomberg survey of economists. While above the modest 114,000 gain in July, average growth over the most recent three months would ease to a little more than 150,000 — the smallest since the start of 2021.

A survey conducted by 22V Research shows most investors (44%) think the market reaction to Friday’s data will be “risk-on,” 27% said “risk-off” and 29% “negligible/mixed.”

The tally also underscored a notable shift — with the unemployment rate gaining more attention this month. Meantime, the focus on wage growth has dropped further. And 52% of respondents expect payrolls to beat the 165,000 projection.

To Stan Shipley at Evercore, Thursday’s ADP private employment tally and other labor-market metrics suggest a “soft payroll” for August.

“Tomorrow’s payroll report could be softer than expected given the slowdown in ADP estimates” said Jeffrey Roach at LPL Financial. “If the payroll report surprises investors and comes in weaker than expected, the likelihood of a 50 basis-point cut increases at the upcoming Fed meeting.”

While the ADP report has been a poor prognosticator of non-farm payrolls in recent years, its correlation to the print has been improving this year.

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This story was produced with the assistance of Bloomberg Automation.

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