Stocks eased as action moves to rates and jobs By Reuters

A look at the day ahead in US and global markets from Mike Dolan

US stocks appear to have weathered the early September storm for now, but interest rate speculation and falling bond yields are now front and center as evidence grows of a slowing US labor market.

Futures markets now see a near 50-50 chance of the Federal Reserve cutting interest rates by 50 basis points this month, and two-year Treasury yields fell 3.75% on Thursday for the first time in 16 months.

In a sign that the Treasury market suspects the Fed may be slow to move past the weakening employment picture, the spread between two-year yields and the Fed’s policy rate is the widest since 1981.

And after more than two years of the inverted 2-year to 10-year Treasury yield curve, the gap has narrowed to zero. And while traditional market signals about this particular business cycle have been repeatedly wrong, that measure of the yield curve turned historically positive even before the onset of the recession.

As a week of big readings unfolds in the labor market, the reasons for the increased easing of speculation are clear.

After another tough update on contracting manufacturing activity on Tuesday, data on Wednesday showed that US job openings fell to a 3½-year low in July.

Even though these numbers are for the month before this week’s critical August jobs report, the Fed’s latest “Beige Book” economic update described the jobs market as “broadly stable, to slightly up in the past few weeks,” and the stakes are rising.

The ratio of job openings to job seekers is basically back to pre-pandemic levels.

Private sector jobs data and updates on layoffs for August, as well as weekly jobless claims figures, are all due later Thursday.

That the Fed is now pursuing them as a priority is not in doubt, and San Francisco Fed President Mary Daly told Reuters late on Wednesday that the Fed needs to taper to keep the labor market healthy.

“As inflation comes down, we have a rising real interest rate in a slowing economy; that’s a basic recipe for over-tightening,” Daly said in an interview.

Atlanta Fed President Raphael Bostic said he is now paying as much attention to the Fed’s maximum employment mandate as inflation. “We must not maintain a restrictive policy position for too long,” he said.

All of this can reasonably unsettle the stock market, but the Atlanta Fed’s real-time “GDPNow” growth model shows the economy continuing to grow by more than 2% in the current quarter. Services sector surveys for August are due later on Thursday and are likely to give a better picture of activity than factory readings earlier in the week.

Fueling speculation and a rally in the bond market, oil prices continue to struggle and prices remain below $70 a barrel – posting year-on-year declines of nearly 20% for the first time in a year.

The Bank of Canada felt emboldened enough to cut its policy rates Wednesday for the third time this year, as expected. But Gov. Tiff Macklem, citing weak growth, said a bigger cut may be needed if the economy needs a boost.

So, pending key reports from the rest of the week, Wall Street’s stock indexes steadied on Wednesday after a sell-off earlier in the week – with futures marginally in the red before the bell today and global shares slightly lower.

The volatility indicator settled around 20 – well above historical averages.

It was also lower, with a slight uptick from upbeat German industrial orders data for July, which lifted the manufacturing gloom somewhat.

However, keeping the eurozone image in context, Germany’s Ifo institute said the economy there was likely to stagnate this year, dropping its previous forecast of 0.4% growth.

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

* August US private sector payrolls from ADP, weekly jobless claims, August layoffs, August service sector surveys from ISM and S&P Global, Q2 productivity and unit labor cost revisions

* US Corporate Earnings: Broadcom (NASDAQ: ), DocuSign (NASDAQ: ), Smith & Wessson, American outdoor brands (NASDAQ:), etc

* US Treasury sells 85 billion dollars of notes over 4 weeks

(By Mike Dolan; Editing by Ros Russell; [email protected])