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Bank of America warns that a positive August jobs report due out Friday could send the stock market lower.
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A higher nonfarm payrolls figure could recalibrate rate cut expectations, weighing on investor sentiment.
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Economists are predicting 162,000 jobs will be created in August, but some expect as many as 225,000.
The biggest risk to the stock market this week is a more positive than expected August jobs report, according to Bank of America.
The bank highlighted the risk in a note on Monday, arguing that too high an employment reading would overstate the number of interest rate cuts expected this year.
“Stocks appear more excited about the cuts than concerned about a potential recession, judging by their return to near-peak levels and the outperformance of small-cap stocks and the equal-weighted S&P,” said Bank of America strategist Ohsung Kwon.
He added: “If that's true, the main risk to stocks this week is a positive NFP that pushes short-term rate prices higher again.”
The nonfarm payrolls report for August is due out Friday morning. Economists expect 162,000 jobs were added to the economy last month, which, if true, would reduce the unemployment rate from 4.3% to 4.2%.
Bank of America economists expect just two 25-basis-point interest rate cuts this year, while the market is pricing in “recession-sized” 100-basis-point rate cuts, according to the CME FedWatch tool.
If the US economy stages a strong rebound from the weak July jobs report, it could trigger a shift in market sentiment and show that investors are overly confident in the Fed's rate-cutting path.
According to the note, this would likely put downward pressure on the stock market as Kwon recommended investors hedge downside risk with October put option spreads in the stock market. S&P 500 Index.
Recent signs of a resilient economy include upwardly revised second-quarter GDP growth, to 3.0% from 2.8%, as well as solid personal spending data, which rose 0.5% month-over-month in July.
“The economy continues to disprove the skeptics. Growth has certainly cooled from last year, but at a gradual pace,” Kwon said.
One Wall Street strategist who expects a positive jobs report on Friday is Ed Yardeni of Yardeni Research.
In a note to clients on Monday, Yardeni said he expects between 200,000 and 225,000 jobs were added to the economy last month.
If accurate, this would exceed economists' estimates and align with the strong jobs reports seen in May and June, reinforcing the view that the Fed does not need to cut interest rates as much.
“It is highly unlikely that the Fed will have to cut the federal funds rate as quickly and by as much as was necessary during previous monetary easing cycles, when financial crises triggered credit crunches and recessions,” Yardeni said.
While Yardeni's optimistic outlook would be great news for the economy, it could prove a drag on stock prices in the short term.
Read the original article at Business information