Here’s How Markets Could View Friday’s Jobs Report

Judging from interest rate expectations, Wall Street is more pessimistic about the U.S. economy than the Federal Reserve is, and that outlook could be put to the test by Friday’s closely watched September jobs report.

Late Thursday, investors were pricing in a 56% chance that the Fed will cut interest rates by at least 75 basis points before the end of the year, according to CME Group’s FedWatch Tool, which forecasts interest rate decisions based on federal funds futures trading data. A reduction of that size would require the Fed to cuts its benchmark rate by 50 basis points, or half a percentage point, in one of its two remaining policy meetings this year, in November or December.

The Fed cut the fed funds rate by 50 basis points last month, its first rate cut in more than four years, citing progress in the fight against inflation and a deterioration in the labor market. The cut was an unusually large move for the Fed, which more commonly has carried out 25-basis-point adjustments.

The market’s bias toward another jumbo cut puts it squarely at odds with the Fed, whose September dot plot forecasted two 25-point cuts by the end of the year, and most economists, who generally see the U.S. economy on track for a soft landing. It also reflects lingering skepticism on Wall Street about the health of the economy.

According to Deutsche Bank analysts, Wall Street’s aggressive rate cut expectations could end up being a boon to markets over the next few months. “From a market perspective,” analysts wrote in a recent note, the market’s pessimism “suggests that investors could still price in even more good news over the months ahead if economic growth does hold up.”

Much More Data Before Next Fed Meeting

Key labor market updates this week have sent mixed signals about how well the economy is holding up. The number of job openings increased in August, but the hiring rate dipped to April 2020 levels. One report indicated private hiring rebounded in September, while another suggested layoffs were unseasonably high.

Friday’s September jobs report could help clarify the relatively muddy picture painted by this week’s other data. A report that’s generally in line with expectations would likely bolster the case for slow-and-steady easing, wrote Oxford Economics’ Lead Economist Nancy Vanden Houten in a recent note. “If the report on balance is much weaker than expected,” she wrote, “it could be enough to prompt the Federal Reserve to lower rates by another 50bps at its November meeting.”

Bank of America analysts expect the market’s reaction to Friday’s report to be tempered by the fact that there’s a month’s worth of data still to be released before the Fed’s rate decision. Traders, the analysts said in a recent note, are unlikely to write off a 50-point cut until after September’s inflation data and October’s jobs report, both of which will be released the week before the Fed’s November meeting.

“We think a soft employment report is likely to generate a larger market response vs a strong labor report,” the analysts wrote.