Equities could stumble if data dents June rate-cut hopes, strategist says
How hot is too hot?
Friday is jobs-report day. That means stakes are high for a stock-market rally that’s faltered this week as investors assess the likelihood of rate cuts by the Federal Reserve later this year.
Economists surveyed by the Wall Street Journal, on average, look for nonfarm payrolls to show a rise of 200,000 in March, with the unemployment rate expected to tick down from 3.9% to 3.8%. Growth in hourly wages is expected to slow to a year-over-year rate of 4.1%, from 4.3% in February.
The setup for the stock market heading into the release of the Labor Department’s April employment report at 8:30 a.m. Eastern time is a bit out of the ordinary, Tom Essaye, founder of Sevens Report Research, said in a Thursday note.
While either a “too hot” or “too cold” jobs figure is often sufficient to spark a market selloff, the biggest danger on Friday is firmly tilted toward a stronger-than-expected reading, he said.
“Investors are on edge the Fed may delay rate cuts from June until later in the summer (or late in 2024) if we get another hot employment report,” Essaye wrote. ”If that occurs, expect a partial repeat of Tuesday,” when the Dow Jones Industrial Average fell nearly 400 points, or 1%, while the S&P 500 lost 0.7% and the Nasdaq Composite declined 1%.
Those concerns were underlined Thursday afternoon after Minneapolis Fed President Neel Kashkari said he had penciled in two rate cuts for 2024 but that it was possible none would be delivered if inflation continued to move sideways. Stocks accelerated a selloff after the remarks, with the Dow slumping around 530 points, or 1.4%, and the S&P 500 sliding 1.2%.
Of course, investors had come into 2024 expecting the Fed to deliver as many as six quarter-point rate cuts by year-end, beginning in March. Those expectations were whittled down to around three rate cuts, March came and went with no cut, and stocks still rallied to a series of record highs, with the S&P 500 logging a first-quarter gain of around 10%.
Fed-funds futures on Thursday afternoon reflected a 40.7% probability policy makers will leave the key rate unchanged at their June meeting, according to the CME FedWatch Tool.
The problem, Essaye said, is that a “too hot” figure — some combination of payrolls over 250,000, an unemployment rate above 3.7% or wage growth of more than 4.3% — would spark another jump in Treasury yields such as that seen earlier this week. That could push the 10-year yield BX:TMUBMUSD10Y, trading near 4.31% Thursday afternoon, further out of the “stock-positive” trading range of 3.75% to 4.25%.
In fact, the jump in yields that is likely after a figure that hot could knock the S&P 500 down by 1% or more, while defensive sectors such as utilities, healthcare and staples would be expected to outperform.
A “just right” figure largely in line with expectations could spark a modest “relief rally” for stocks, he said, while a “too cold” figure, such as a payrolls rise of less than 50,000, would raise questions about the health of the economy. Such a reading would contribute to fears over the strength of the economy but could also spark a short-term “bad is good” reaction as Treasury yields pull back, Essaye argued.
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