The stock market’s biggest risk this week is a tepid August jobs report, BofA says

• Bank of America warns that a hot August jobs report on Friday could send the stock market lower.

• A strong non-farm payrolls number may recalibrate rate cut expectations, weighing on investor sentiment.

• Economists forecast 162,000 jobs added in August, but some expect 225,000.

The biggest risk to the stock market this week is a hotter-than-expected jobs report in August, according to Bank of America.

The bank highlighted the risk in a note on Monday, arguing that a too-hot employment reading would change the number of expected rate cuts this year.

“Stocks seem more excited about the cuts than concerned about a potential recession, judging by their return to near highs and the performance of small caps and the equal-weighted S&P,” Bank of America strategist Ohsung Kwon said.

He added: “If true, the main risk for equities this week is a hot NFP repricing short-term rates higher.”

The August nonfarm payrolls report will be released Friday morning. Economists expect 162,000 jobs were added to the economy last month, which, if accurate, would lower the unemployment rate to 4.2 percent from 4.3 percent.

Economists at Bank of America 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 CME FedWatch Tool.

If the US economy sees a strong rebound from July’s weak jobs report, it could lead to a shift in market sentiment and prove that investors are overconfident in the Fed’s rate cut trajectory.

According to the note, this would likely put downward pressure on the stock market, as Kwon advised investors to hedge downside risk with October spreads on the S&P 500.

Recent signs of a resilient economy include second-quarter GDP growth revised up to 3.0% from 2.8%, as well as solid data on personal spending, which rose 0.5% month-on-month in July.

“The economy continues to disprove the skeptics. Growth has certainly cooled from last year, but it has done so at a gradual pace,” Kwon said.

One Wall Street strategist expecting a hot jobs report on Friday is Ed Yardeni of Yardeni Research.

In a note to clients on Monday, Yardeni said it expected between 200,000 and 225,000 jobs to be added to the economy last month.

If correct, that would blow economists’ estimates and align with strong jobs reports seen in May and June, playing into the idea that the Fed doesn’t 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 as much as it has needed to during previous cycles of monetary easing, when financial crises have triggered credit crunches and recessions,” Yardeni said. .

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While Yardeni’s bullish outlook would be great news for the economy, it could prove to be a headwind for stock prices in the near term.

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