Economic Indicators to Watch This Week
This week, economic data could play a critical role in influencing stock market trends. A key focus will be the monthly jobs report, alongside other significant economic updates. If these indicators surprise on the upside, they could propel the stock market to higher levels.
Stuart Kaiser, Citi's head of US equity trading strategy, suggests that if the Federal Reserve is perceived to be cutting interest rates amid steady economic growth, robust labor conditions, and easing inflation, it would be a 'hugely bullish' scenario for equities.
"The focus is on the economy's growth and consumer strength," Kaiser noted. "Data indicating sustained consumer spending without the feared weakness could positively impact equity markets."
Labor Market and Manufacturing Data on the Radar
This week's updates will include labor market insights such as the ADP payroll data and the Job Openings and Labor Turnover Survey (JOLTS). Investor attention will also be drawn to the Institute of Supply Management's reports on manufacturing and services sector activity.
Economists project that the manufacturing sector remained in contraction for September, while services activity held steady from August.
On Friday, the September jobs report is anticipated to reveal the addition of 130,000 nonfarm payroll jobs with unemployment stable at 4.2%, as per Bloomberg. The previous month saw 142,000 new jobs and an unemployment rate of 4.2%.
Market Reactions and Strategic Implications
Ohsung Kwon, Bank of America Securities' equity and quant strategist, pointed out that both jobs and manufacturing data have shown weakness in recent months. Thus, any significant deviation from expectations might rekindle recession fears.
Conversely, stronger-than-expected results could bolster confidence in a soft landing for the economy, Kwon adds.
Mike Wilson, Morgan Stanley's chief investment officer, emphasized the pivotal role of labor market data in the coming months. For a market shift favoring economically sensitive sectors, labor statistics need to perform better than anticipated.
"We anticipate a decline in the unemployment rate along with payroll gains exceeding expectations," Wilson stated, "without notable downward revisions for previous months."
Federal Reserve's Role and Investor Outlook
The strategists' perspectives highlight the necessity for evidence that the Federal Reserve's rate cuts aren't driven by concerns over the US economy's direction. On Sept. 18, the Fed's decision to cut rates by half a percentage point underscored its intent to sustain a sound economy.
This move led to a rally in stocks, hitting new records. More proof of Fed rate cuts amid favorable conditions would be bullish for stocks, according to Citi's Kaiser. However, this week's data could challenge that narrative.
"If it appears that rate cuts stem from genuine concerns about labor market weakness, they may not suffice to support equities, potentially leading to declines," Kaiser warned. "Understanding the motive behind Fed cuts is crucial, and payroll reports will provide clarity."
Federal Reserve Board Chair Jerome Powell emphasized this point during a press conference following the Federal Open Market Committee's meeting on Sept. 18, 2024.
