Morning Deal: Salaries, Williams and Waller

(Reuters) – A look at the day ahead in US and global markets from Mike Dolan

Friday looks set to play out like a concentrated version of what markets have navigated all year – which is the fine balance for the US economy to both avoid recession and allow interest rates to come down at the same time.

After a torrent of labor and business updates all week, the August employment report now acts as the deciding factor, setting the tone for both this month’s Federal Reserve meeting and the holy grail of a “landing software” for the economy.

With one exception, early surveys show a labor market that is indeed slowing. Private sector wage growth last month was well below forecast, layoffs are rising and vacancies are shrinking. Only the drop in weekly jobless claims — the latest reading — suggests otherwise.

For stock markets, a significant increase in the unemployment rate or a decline in job creation would inevitably raise fears of a future recession, as it did last month, even if it would also likely shift the dial toward a 50-point cut. basis points (bps) Fed rates on September 18.

The recent re-emergence of a negative correlation between stocks and Treasuries may well be entrenched, isolating many mixed asset portfolios such as 60/40 stock/bond formulations.

Nerves ahead sent stock futures down nearly 1 percent before the bell on Friday as the index headed for its worst week since April. The “fear index,” or volatility gauge, is back above 22.

However, the two-year yield fell to 3.70% for the first time since May last year. Ten-year yields also fell, leaving the 2-10 year yield curve on a knife-edge and inverted by just 1 bp.

The dollar fell back to late August levels.

If the consensus forecast turns out to be correct, of course, it will likely calm the horses.

And for the record, markets expect payrolls to have risen last month to 160,000 and the unemployment rate to have fallen a tenth of a percentage point to 4.2%.

The unemployment rate has been in the spotlight ever since it triggered the so-called “Sahm ​​rule” last month, about the speed at which a rise in rates suggests recession in the coming year.

Even though the author of the rule – former Fed economist Claudia Sahm – played down the significance of the trigger this time, it will remain a red flag if the interest rate does not retreat in August as expected.

As for the Fed’s thinking, futures are now pricing the chance of a 50bp cut this month, down from a quarter-point move at just 50%. But there is a significant reduction of 111 bps by the end of the year and 230 bps over the next 12 months.

The first to react to the jobs report will be two of the Fed’s big players – Fed Governor Christopher Waller and New York Fed President John Williams. And then Fed policymakers head into their traditional shutdown period before the next meeting.

On Thursday, US Treasury Secretary and former Fed Chair Janet Yellen said the US still had a “good, healthy labor market”, even though the pace of job creation has slowed.

The Fed has already made clear its intention to begin easing this month and has publicly shifted its focus from falling inflation to the state of the labor market, the second of its two mandates.

With oil prices back below $70 a barrel and down more than 20% year-to-date, inflationary pressures are further dissipating.

TECHNIQUE IN FOCUS

In corporates, market anxiety is also focused on high shares of chipmakers, and overnight news continued to be unsettling on that front.

Broadcom (NASDAQ: ) on Thursday reported fourth-quarter revenue slightly below Wall Street expectations, hurt by sluggish spending in its broadband segment. Despite a strong increase in orders for its artificial intelligence chips, its shares fell more than 7% on the hour.

However, Qualcomm (NASDAQ: ) has explored the possibility of acquiring parts of Intel’s (NASDAQ: ) design business to boost the company’s product portfolio, according to two sources familiar with the matter.

Next on the horizon for the tech sector is Apple’s (NASDAQ: ) expected launch of its latest iPhone next week, a model expected to include new AI capabilities.

In politics, markets are also gearing up for next Tuesday’s first televised debate between US Republican nominee Donald Trump and his Democratic running mate Kamala Harris.

Both candidates this week detailed several economic plans, with Harris indicating a lower capital gains tax proposal than the current administration and Trump proposing a corporate tax rate as low as 15 percent.

Around the world, stock markets in Europe and Asia were generally on the back foot ahead of payrolls.

A big development in Europe was Raiffeisen Bank, which fell 7 percent after a Russian court froze shares in the lender’s Russian unit, which the company had planned to dissolve.

Key developments that should provide more direction for US markets later Friday:

* August US employment report; Employment report in Canada August

* Federal Reserve Board Governor Christopher Waller and New York Fed President John Williams speak after the wages report

(By Mike Dolan; Editing by Sharon Singleton; [email protected])