US Jobs Data May Hurt Stocks if it Lets the Fed Hold Back Rate Cuts
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US Jobs Data May Hurt Stocks if it Lets the Fed Hold Back Rate Cuts
By:Ilya Spivak
The report comes at the end of a busy week of data releases that showed inflation has accelerated more than economists anticipated
- US jobs data is in focus after inflation quickens more than expected.
- Another contraction of the US manufacturing sector is on the menu.
- Stock markets may struggle if the Fed gets cover to delay rate cuts.
A closely watched update on the state of the US labor market will mark a powerful test of financial markets’ mettle. It will book-end a busy week of data releases that showed inflation has accelerated more than economists anticipated and the Federal Reserve pushed back on interest rate expectations.
The Bureau of Labor Statistics (BLS) is expected to report that nonfarm payrolls added 110,000 jobs in July, marking a slowdown from the rise of 147,000 recorded in the previous month. An outcome in line with expectations would mark the smallest increase since February. The unemployment rate is seen ticking higher to 4.2%, from 4.1%.
A separate report from the Institute of Supply Management (ISM) is expected to show economic activity in the US manufacturing sector shrank in July for a fifth consecutive month. However, the pace of contraction is projected to slow for a second month in a row, producing the narrowest loss since the last expansion in February.
US jobs data in focus after inflation rises more than expected
The personal consumption expenditure (PCE) measure of US inflation – the Fed’s favored gauge – showed that price growth quickened to 2.6% year-on-year in June. This topped median forecasts looking for 2.5%. Stripping away volatile food and energy, core prices rose 2.8%. That matched the revised-up three-month high from May.
Benchmark Fed Funds futures show markets have priced in just 29 basis points (bps) in interest rate cuts this year, making for the least dovish view since mid-February. At the same time, the stimulus outlook for 2026 has continued to grow. Traders now price in 83bps in rate cuts, the most since the relevant contracts began to trade over three years ago.
Stocks may struggle if the Fed gets cover to postpone rate cuts
This stands in stark contrast to the Fed’s own projections. Their latest update in June showed the central bank expects to issue two 25bps rate cuts in 2025 and just one more next year. The gaping disparity between this and the markets’ view suggests investors are girding for an economic downturn, with the Fed rushing to cut later having dithered now.
A dovish minority on the Fed’s policy-steering Federal Open Markets Committee (FOMC) is growing louder in its calls for faster rate cuts. Chair Jerome Powell has acknowledged the emergence of risks to the labor market but argued that ongoing uncertainty about the impact of the Trump administration’s tariffs on inflation demands patience.
A relatively benign jobs report that gives Powell and the Fed’s “wait-and-see” camp adequate cover without blockbuster gains to soothe the markets’ growth fears may sour the mood for stock markets. Meanwhile, the US dollar might continue to power higher as its yield advantage is reasserted.
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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