We see U.S. index futures flat / slightly higher on light trading volume and volatility as traders prepare for a key U.S. jobs report that could potentially ease pressure on the Federal Reserve to raise interest rates again.
Stocks in Europe trade higher by ~0.5% with insurers and mining companies leading the gains. Commodity prices, and oil prices in particular, are showing signs of bottoming after falling sharply in recent sessions on widespread fears that the Fed’s rate hike forecast and yields at levels last seen in 2007 would continue to weigh on markets and consumer/corporate demand.
Tesla is weighing on the S&P 500 and Nasdaq after the company announced another round of price cuts and is currently trading 1.6% lower.
However, all eyes are on the nonfarm payrolls report, which showed employers added 170,000 jobs in September, down from 187,000 in August. Labor market data earlier in the week provided a mixed picture, with job openings coming in above estimates, ADP private sector employment data coming in weaker than expected, and yesterday’s jobless claims remaining at a low level. I believe the “real” expectations are slightly below 170,000 after Wednesday’s ADP report, which opens up room for disappointment. I don’t expect the NFP data to show a slowdown similar to the ADP payrolls report.
I overall don’t expect a big surprise or data that could change the Fed’s interest rate outlook. However, given the typically weak hiring numbers in September and recent signs of a slowdown, it is likely that payrolls have continued to fall. The overall picture is unlikely to change, however – the U.S. labor market is robust and wage inflation remains stubborn as well.
We see Treasury yields to rise ahead of the data. A slowdown in hiring would help bring yields back down temporarily and provide some relief for equities – but the overall outlook remains pretty bleak.
I expect corporate revenue growth to continue to decline in the coming months, and this will increasingly be felt by U.S. companies. Wall Street is still trading at historically high levels, especially considering that future sales growth will slow.
In an initial reaction, we could see counter-movements after the recent heavy selling. Oil prices could also finally recover somewhat after the heavy selling and come out of oversold territory. However, the overall picture will not change. Yields will likely continue to rise, with 10-year bond yields likely to rise further towards 5% in the coming weeks.
IF (!) the NFP data shows a significant slowdown in job growth, we will see a sharp rise in equities – especially interest rate sensitive equities. Yields would temporarily decline (possibly by more than 10 basis points – depending on the actual numbers) and the USD would weaken significantly, benefiting other risk assets such as commodity prices. However, I do not expect a significant weakening.