Jobs Data Set to Influence Interest Rates and Stock Market Trends

By Lewis Krauskopf

In the upcoming week, a key employment report will be released, providing investors with insights into the health of the U.S. economy. This data is crucial as it could influence the future direction of interest rates.

As December approaches, stocks are nearing record highs, boasting a gain of over 25% for the year so far. This surge has been partly driven by expectations that the Federal Reserve will continue to lower interest rates into next year after cutting them by 75 basis points in 2024.

However, uncertainty surrounding the Fed's approach to rate cuts has grown in light of recent strong economic data, particularly a surprising jobs report from September. Such reports raise concerns that if the Fed acts too aggressively in cutting rates, inflation could rise again, potentially reversing progress made in managing prices over the past two years.

If another solid jobs report is released on December 6, it could dampen expectations for further rate cuts and heighten inflationary fears among investors.

According to Angelo Kourkafas, a senior investment strategist at Edward Jones, "The jobs data is going to provide a clearer understanding of the underlying trend, which is essential given the current debate and uncertainty regarding the Fed's interest rate path."

Wall Street has already started to adjust its expectations for rate cuts in the upcoming year. Futures trading indicates that investors are betting on a drop in rates to around 3.8% by the end of next year, which is over 100 basis points more than what was anticipated back in September.

Recently, Fed Chair Jerome Powell stated that the central bank does not need to rush to reduce rates, given the strength of the job market and persistent inflation above its 2% target. As Sameer Samana, a senior global market strategist at Wells Fargo Investment Institute, noted, the Fed is reconsidering how much more easing the economy might require, particularly in terms of labor market conditions.

Current futures trading shows about a 70% chance that the Fed will opt to cut rates by 25 basis points during its meeting on December 17-18, as reported by CME Fedwatch.

Economists surveyed by Reuters predict that payrolls increased by 183,000 jobs in November. If the actual numbers significantly surpass this expectation, it could shake confidence in a possible December rate cut and negatively impact stock prices, as stated by Anthony Saglimbene, chief market strategist at Ameriprise Financial.

"A stronger-than-expected jobs report could potentially trigger a sell-off in the market," he remarked.

Recent market behavior reflects a positive sentiment regarding policies expected from President-elect Donald Trump, such as tax cuts and deregulation, which many believe could enhance economic growth even if they carry inflationary risks.

Despite Trump's commitment to imposing substantial tariffs on Canada, Mexico, and China—three of the largest trading partners of the U.S.—stocks have shown resilience. Optimism was further supported by a survey conducted by the Conference Board, revealing that a record 56.4% of consumers anticipate rising stock prices over the next year.

Currently, the S&P 500 index trades at more than 22 times earnings estimates for the coming 12 months, its highest price-to-earnings ratio in over three years, according to LSEG Datastream.

However, analysts at Yardeni Research caution that such growing optimism among investors may signal a potential risk to the current stock market rally. In their note, they stated, "A more immediate risk to the stock market rally than tariffs is that investors are becoming overly bullish. From a contrarian viewpoint, this suggests a pullback may be forthcoming."

jobs, rates, stocks