Economy

Jobs Data Will Influence Interest Rate Trajectories and Stock Markets

Published November 29, 2024

By Lewis Krauskopf

NEW YORK (Reuters) - In the upcoming week, investors are set to receive new insights into the status of the U.S. economy with the anticipated release of an important employment report. This report could play a significant role in determining the future direction of interest rates over the coming months.

As December approaches, stocks are poised near record highs, having achieved an impressive over 25% gain year-to-date. This strong performance has been partly attributed to investor expectations that the Federal Reserve will keep cutting interest rates into next year, after a 75 basis point reduction earlier in 2024.

However, recent months have seen growing uncertainty regarding the Fed’s interest rate plans. Strong economic data, including a surprising jobs report from September, has raised concerns that inflation might rise again if the central bank lowers rates too aggressively, potentially reversing two years of progress in controlling prices.

While investors generally welcome signs of economic strength, another set of robust jobs data on December 6 could diminish hopes for further Fed rate cuts and increase worries about inflation. Investors are keenly aware that the jobs report will provide clarity on the underlying economic trends, which is crucial amid ongoing debates about the Fed's interest rate path, according to Angelo Kourkafas, a senior investment strategist at Edward Jones.

Wall Street has already lowered its expectations regarding interest rate cuts over the next year. Current pricing in Fed funds futures indicates that investors are betting on a decrease to approximately 3.8% by the end of next year, compared to the present range of 4.5% to 4.75%. This figure is over 100 points higher than investor projections from September.

Recently, Fed Chair Jerome Powell stated that the central bank does not feel an urgent need to lower rates, citing a strong job market and inflation still above the desirable 2% target.

According to Sameer Samana, a senior global market strategist at Wells Fargo Investment Institute, the Fed is now "starting to question" how much more easing the economy—and particularly the labor market—actually requires.

Futures pricing indicates there is around a 70% chance that the Fed will implement a 25 basis point cut during its meetings on December 17-18, according to data from CME Fedwatch. Economists surveyed by Reuters anticipate a payroll increase of about 183,000 jobs in November. A jobs report that exceeds this expectation could shake investor confidence in a potential December rate cut and negatively impact stock prices, as noted by Anthony Saglimbene, chief market strategist at Ameriprise Financial.

There is a possibility of a market sell-off if the jobs report comes in stronger than anticipated, he warned.

Stocks have recently benefited from optimism surrounding policies proposed by President-elect Donald Trump, such as tax cuts and deregulation, which are thought to potentially drive economic growth, despite concerns about inflation.

Moreover, stocks have largely overlooked Trump’s vow to impose significant tariffs on Canada, Mexico, and China, which are America's top three trading partners. Further optimism is reflected in a Conference Board survey that revealed a record 56.4% of consumers expect stock prices to rise over the next year.

Currently, the S&P 500's trading price exceeds 22 times earnings projections for the next 12 months, marking its highest P/E valuation in more than three years, according to LSEG Datastream.

However, strategists from Yardeni Research caution that this growing optimism might be a concerning indicator. They commented that "a more immediate risk to the stock market rally than tariffs is that investors are getting too bullish," suggesting that a market pullback could be on the horizon.

Jobs, Economy, Stocks