US jobs data poses hurdle for rate-cut hopes, stocks rally

By Lewis Krauskopf

NEW YORK (Reuters) -A U.S. labor market report late next week will give a crucial read into the economy’s health and test investors’ confidence that interest rate cuts are coming soon, a view that has helped lift U.S. equities to record-high levels.

Last month’s release of surprisingly weak U.S. payrolls dataraised expectations that the Federal Reserve will start cutting rates again at its next meeting in September, as the central bank moves to support the labor market despite inflation worries.

A soft August employment report next Friday could raise concerns about a slowing economy, but it also might lead the market to price in more aggressive cuts, said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions.

“Lower rates probably trump a modestly slowing labor market, and that probably puts a floor underneath the economy and … the stock market,” he said.

U.S. equities have charged higher since hitting their lows for the year in April. Investors have shaken off concerns that U.S. President Donald Trump’s tariffs would send the economy into a recession, while a wide swath of tech and other stocks have benefited from optimism about the business potential of artificial intelligence.

Stock indexes fell on Friday, as declines in AI-related names added to recent shakiness in tech stocks, with earnings reports from heavyweight chipmaker Broadcom due on Thursday. Still, the benchmark S&P 500 ended the traditionally challenging month of August up 1.9%, pushing its year-to-date gain up to about 10%, near record-high levels.

Markets remain in a historically treacherous patch on the calendar. Over the past 35 years, September has ranked as the worst-performing month of the year for the S&P 500, with an average decline of 0.8% during that period, according to the Stock Trader’s Almanac. The index has fallen 18 of 35 times in September, the only month to have been down more than up in that period, according to the Almanac.

The jobs report is September’s first major economic release. Employment in August is expected to have climbed by 75,000 jobs, according to a Reuters poll. In the prior month’s report, nonfarm payrolls grew by 73,000, a surprisingly weak number compounded by sharp downward revisions to growth in the prior two months.

Alex Grassino, global chief economist and head of macro strategy at Manulife Investment Management, said he expects components of the jobs report, such as the unemployment rate and hourly earnings, “to point to basically the same message, which is the U.S. labor market has cooled.”