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U.S. NFP Preview: Stocks at Risk as Recession Fears Top Fed Rate Cut Hopes

By:Ilya Spivak

U.S. jobs data may come out weaker than the markets are expecting. If that spooks stocks despite building Fed rate cut expectations, more trouble is probably ahead.

  • Stock markets may be losing their appetite for soft U.S. economic data.
  • November’s employment statistics may end up weaker than expected.
  • There’s trouble ahead if Wall St. can’t rally on firmer Fed rate cut bets.

A mere two weeks ago, financial markets might have been expected to loudly cheer at the sight of any economic data that seemed to bring the Federal Reserve closer to cutting interest rates. In fact, November was defined by blistering gains in stocks and bonds together on this very premise.

Last week, something appeared to change. Wall Street was conspicuously unimpressed as bond yields continued to plummet. The U.S. dollar managed a small gain. It seemed the market was no longer content to celebrate cheaper money and starting to wrestle with why it was probably on the way: looming recession.

Stock market and U.S. economic data: defining “good” vs. “bad”

More confirmation seemed to emerge this week. U.S. stocks managed a mere hour of gains after a disappointingly low reading on November’s estimate of private-sector payrolls growth from Automatic Data Processing (ADP). The bellwether S&P 500 then turned promptly lower and finished the day down 0.4%.

Futures-implied FOMC outlook vs. S&P 500
Source: Bloomberg

The stickiness of these emerging price dynamics was tested again with the weekly jobless claims release. This helpfully showed the process working in reverse. Continuing claims—a gauge of how hard it is for the recently unemployed to find new work–printed notably lower than expected. Stocks roared higher in response.

The spotlight now turns to November’s official set of U.S. employment figures. Analysts expect it to show that 185,000 jobs were added to nonfarm payrolls, a mild pick-up from October’s 150,000. The jobless rate is seen steady at 3.9% while average hourly earnings growth—a measure of wage inflation—slows to a 29-month low of 4% year-on-year.

U.S. jobs report: who’s surprised?

Leading purchasing managers index (PMI) data from S&P Global suggests that last month, employment across the manufacturing and service sectors shrank in tandem for the first time since mid-2020. Analog data from the Institute of Supply Management (ISM) was only a touch more encouraging. It put service-sector hiring at near-standstill.

How markets respond if echoes of that weakness are on display in the government’s own numbers may be critical. Soft outcomes will help underpin last month’s tectonic dovish move in the rates outlook. If that spooks stocks as traders see the pain behind the policy pivot, 2023 may well end on a whimper.

U.S. Employment Situation
Source: Bloomberg

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak 

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