Friday's Jobs Report Will Have a Major Impact on What the Fed Does Next
A weak jobs number will push the central bank to cut rates by a half point — but that may cause increased fear that a recession cannot be avoided.
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The August jobs report, which will be released at 8.30 a.m. ET on Friday morning, is of much more importance than usual because it will have a significant impact on what the Fed does at its next policy meeting on September 17-18. An interest rate cut is a certainty, but the issue is whether it will be a quarter point or a half point.
If the jobs report is solid, then it will help confirm that the Fed has been successful in engineering a soft economic landing. That doesn't mean that there won't be significant slowing in the future, but it will allow the Fed to cut rates more gradually to help boost the economy after years of tightening.
If the numbers come in weaker than expected, however, then it will create the impression that the Fed is moving too slowly. A half-point cut will make it look like the Fed has lost control and is now concerned that it has not acted fast enough.
Recently, the market has been struggling as it grows increasingly concerned that the Goldilocks' economic narrative is too optimistic. While inflation now seems well under control, years of high interest rates have an economic impact that is now starting to be felt to a greater degree. The hope is that rate cuts will prevent a recession, but once economic growth starts to slow, it is difficult to turn it even with lower interest rates.
This economic debate is occurring at the same time the stock market is dealing with several important issues. First, the Magnificent Seven names and Nvidia NVDA, in particular, are no longer leading the market steadily higher. While AI is still a major economic force, there is concern that it will take longer and cost more than expected before it starts to contribute to the bottom line. While it is debatable whether there ever was an AI bubble, whatever it was is now deflating.
The second issue is that this shift is occurring as the market deals with poor seasonality in September and the market corrects after becoming extended and overbought. The news flow is providing a very convenient excuse for a deeper correction, and there is an inclination to embrace a negative spin regardless of the August jobs numbers.
I've been cautious and raising cash for a couple of weeks now and will continue to stay patient and play defense. The best thing that could happen is a sharp jump in volatility on the jobs news, which would shake things up and create new opportunities.
There are signs of some economic slowing in Europe Friday morning, which is helping to create weak action early on.
At the time of publication, Rev Shark had no positions in any securities mentioned.
