MANHATTAN (CN) — Investors seem to have complete confidence in an interest rate cut next month, as markets put up moderate gains in the face of dovish talk from the Federal Reserve and disappointing employment revisions.
The Dow Jones Industrial Average spent the week basically treading water until Friday, when it finally pulled ahead and closed out the week up by 515 points. The S&P 500 and Nasdaq both had similar outings, gaining 80 points and 246 points for the week, respectively.
Markets rose slightly Thursday after the U.S. Bureau of Labor Statistics released its preliminary revisions to U.S. payrolls, which showed the 818,000 fewer jobs were gained from April 2023 to March 2024 than originally reported.
The revisions all came from the private sector, with manufacturing, leisure, and professional services seeing the biggest changes. Manufacturing, which has seen some weakness this year, was revised downward by 115,000 jobs, while leisure and hospitality employment was modified down by 150,000 jobs.
Such revisions are common, but the size this time was larger than most in recent years. Experts say the revisions jibe more with the agency’s household survey, which typically does not double-count employees who switched jobs but still remain on another payroll during the survey period.
The news was a net positive for Wall Street, which hopes the Federal Reserve has been inundated with enough data to justify a 0.5% interest rate cut. However, since the Fed is all but guaranteed to cut rates by 0.25%, investors will be keenly focused on the next jobs report due out Sept. 6.
“Should the next payroll report come in softer than already modest expectations, and should the unemployment rate tick higher yet again, markets and the Fed itself will have to consider whether 50 basis points is required rather than the 25 basis points currently priced into the futures market,” said Quincy Krosby, chief global strategist at LPL Financial.
Krosby noted the revised jobs numbers also explain the “recent spate of strong earnings” from big box retailers, such as Walmart and Target, as consumers try to be more careful about their purchases. It also backs up a recent New York Fed survey, which noted a record number of workers who believe they will be unemployed in the next four months, he said.
Minutes from the Fed’s last meeting did little to encourage or dismay investors. The only main takeaway was that “several” voting members of the Federal Open Market Committee were open to cutting interest rates by 25 basis points during the July meeting.
Some experts say the minutes guarantee a rate cut. “[T]he debate is not whether the central bank cuts interest rates at its upcoming September meeting but rather how aggressive the initial phase of this normalization cycle should be,” Ryan Sweet, chief U.S. economist at Oxford Economics, wrote in an investor’s note.
The only other statement of note from the minutes was that the Fed’s decision on interest rates next month and going forward will “depend on the totality of incoming data rather than on any particular data point.”
Powell himself on Friday boosted the idea the central bank will slash rates when it meets next. “The time has come for policy to adjust,” he told the audience at the annual Jackson Hole economic symposium.
Still, Powell maintained his discreet nature and hedged his comments somewhat. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” he said.
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