An important job report in the coming week could drive the next big step in the market

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Traders work on the New York Stock Exchange (NYSE) in Manhattan on August 3, 2021.

Andrew Kelly | Reuters

With Jackson Hole in the rearview mirror, August’s employment report could be the next driver for the markets.

Shares rose last week and rose to new highs on Friday following a speech by Federal Reserve Chairman Jerome Powell. The chairman admitted that Fed officials expect to cut their monthly bond purchase program by $ 120 billion this year, a first step in reversing simple policies.

Powell spoke at the Kansas City Fed’s annual symposium in Jackson Hole, Wyo, held in practice this year. He said the Fed had made sufficient progress on the inflation rate, but the labor market had not improved enough to initiate the throttling. He also stressed that unwinding the bond program does not mean that the Fed will automatically move to rate hikes.

“Powell has made it clear that the Fed is not ready to hike rates anytime soon. The market seems to be relieved by this. … With some of the economic data already slowing, I think rate hikes are far, far away and investors are happy. “About that,” said Michael Arone, chief investment strategist for the US SPDR business at State Street Global Advisors.

Arone said the Fed has so far avoided a “taper tantrum,” similar to the 2013 market sell-off when the Fed announced it would pull back on quantitative easing. Powell’s speech was widely expected to clarify the Fed’s position on its $ 120 billion monthly bond purchases after a number of Fed officials called for a wind-up to begin.

Workplaces are the focus

Now the focus of the market is shifting even more to employment data with the release of the employment report for August on Friday.

“The market will certainly respond,” said Jim Caron, director of macro strategies for global bonds at Morgan Stanley Investment Management. “I think it’s important. I think the problem they are going to have is that unemployment benefits don’t expire until early September. “

The dollar index fell after Powell’s speech on Friday morning as stocks hit new highs and government bond yields fell. Other dates in the coming week include the Institute for Supply Management’s release of production data on Tuesday and Wednesday and ADP’s payroll data, sort of a preview of Friday’s government labor market report.

“I wouldn’t be surprised to see a sequel Monday and Tuesday, but before Wednesday ADP I would look for a position adjustment, which means weaker stocks and weaker bonds and a stronger dollar before the job data,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.

He said Powell was cautious as expected, but still insisted that the rejuvenation was imminent. The key for the markets, however, was that he insisted that the end of the program would not mean “tightening” or raising interest rates. The 10-year government bond yield was up over 1.35% this week but fell to 1.3% after Powell spoke on Friday.

“The market is again becoming cautious about the job data. Then it’s a new world in September. You’ll have to wait until after the job dates to see if those steps are ‘moving,’ said Chandler.

Some market pros expected the Fed to announce tapering at their September meeting, but that view has now largely changed to an announcement in November or December. “Given the uncertainty of the Delta, I think it will take more than the next job report,” said Diane Swonk, chief economist at Grant Thornton. “The impairment of jobs is particularly the case when schools have to close again.”

Economists polled by Dow Jones estimate that 750,000 jobs were created in August and the unemployment rate has fallen to 5.2%. In July the economy created 943,000 jobs and unemployment fell to 5.4%. Education was a major contributor in July, with 261,000 new jobs created in public schools and private education.

“It doesn’t have to be a spectacular number to meet their needs,” Swonk said in the August report. “You need a solid number of jobs, just north of half a million … I think we’ll be close to that. You will want to see employment in September as well.”

Market risks

State Street’s Arone said the Fed’s discussion of tapering the markets will be first as the next reporting season begins.

“It’s getting interesting at a time when the Fed is starting to take its foot off the pedal,” he said. “Right now the bull fall is still quite strong, but the markets are not going straight up. If I were to address a specific risk, I’d be keeping an eye on the third quarter earnings reports and, more importantly, what company executives are saying about next year. “

Arone said strong gains have been the biggest driver of market gains and helped investors ignore concerns about the spread of the Covid Delta variant, the US withdrawal from Afghanistan and the dysfunction in Washington.

The market’s summer rally continued last week, with the Dow ending at 35,455, up just under 1% for the week. Both the S&P 500 and the Nasdaq ended the week with record highs.

The S&P 500 rose 1.5% to 4,509 and the Nasdaq rose 2.8% to 15,129.

“The market could ignore all this noise and the rally,” he said, adding that it would be ironic if it was profits that caused a sell-off rather than a change in Fed policy or something else.

He said the market could get choppy in September and October, a seasonally weak time for stocks.

“We took a look at this quarter with Big Tech this quarter – where the numbers exceeded, but they indicated that future quarters would grow more slowly,” said Arone. “Investors didn’t like that and I think it gave us a sense of what happens if it spreads beyond technology to other sectors.”

There is some revenue coming up in the coming week, including Zoom Video Monday, Campbell Soup Wednesday, and Hewlett Packard and Broadcom Thursday.

Ida look

The oil and gas industry is closely monitoring Hurricane Ida, which was heading straight for Louisiana. Oil, gasoline and natural gas all rebounded on Friday as energy companies halted production in the Gulf of Mexico before the storm. Louisiana is also home to a number of refineries.

West Texas Intermediate Futures rose nearly 2% to $ 68.74 a barrel on Friday. The US crude oil benchmark gained more than 10% for the week, the best weekly gain since June 5, 2020.

Calendar for the week in advance

Monday

Merits: Cloudera, zoom video

10:00 a.m. Pending home sales

Tuesday

Merits: Designer brands, NetEase, PVH, Crowdstrike, Ambarella

9:00 a.m. FHFA house price index

9:00 am S&P CoreLogic Case-Shiller House Prices

9:45 am Chicago PMI

10:00 am Consumer Confidence

Wednesday

Merits: Campbell Soup, Chewy, Brown-Forman, Vera Bradley, Nutanix, Smith and Wesson, Asana, ChargePoint

Monthly vehicle sales

7:00 am Weekly mortgage applications

8:15 am ADP employment report

9:45 am Markit manufacturing PMI

10:00 am ISM production

10:00 a.m. building expenses

12:00 p.m. Atlanta Fed President Raphael Bostic

Thursday

Merits: Hewlett Packard Enterprise, Broadcom, Lands’ End, American Eagle Outfitters, DocuSign, Ciena, John Wiley, Signet Jewelers, Hormel, Cooper Cos

7:30 a.m. Downsizing at Challenger

8:30 a.m. unemployment claims

8:30 a.m. Productivity and Costs

8:30 a.m. international trade

10:00 a.m. factory orders

1:00 p.m. Atlanta Fed President Raphael Bostic

Friday

8:30 a.m. Employment Report

9:45 a.m. Markit Services PMI

10:00 am ISM services