The coming week will provide investors with a fresh view into the health of the US economy, with the release of a closely watched employment report that could determine the trajectory of interest rates in the months ahead. Stocks are heading into December with the benchmark near record highs, following a year-to-date gain of over 25%. Expectations of continued interest rate cuts by the Federal Reserve have fueled this performance, but uncertainty over the Fed’s rate trajectory has increased in recent months.
Robust economic data, including a blowout jobs report for September, has stirred concerns that inflation could rebound if the central bank lowers rates too far, undoing two years of progress in tamping down prices. While investors have welcomed evidence of economic strength, another round of strong jobs data on December 6 could further erode expectations for Fed cuts and fuel wariness over inflation.
The jobs data is expected to provide a clearer picture of the underlying trend, which is important as there is a lot of debate and uncertainty around the path for interest rates by the Fed. Wall Street has already tempered expectations for cuts over the coming year, with Fed funds futures showing investors betting the rate will fall to 3.8% by the end of next year, from its current 4.5% to 4.75% range.
Fed Chair Jerome Powell has said that the central bank does not need to rush to lower rates, citing a solid job market and inflation that remains above its 2% target. The Fed is starting to question out loud how much more easing the economy, especially the labor market, really needs.
Economists polled by Reuters expect payrolls to have climbed by 183,000 jobs in November, and a report that far exceeds those forecasts could shake confidence in a December move and bruise stocks. Equities have gotten a boost from the view that President-elect Donald Trump’s policies such as tax cuts and deregulation could spur growth despite their inflationary potential.
However, strategists at Yardeni Research warn that the mounting optimism could be a worrisome signal, suggesting that a pullback is likely. The S&P 500 is trading at more than 22 times earnings estimates for the next 12 months, its highest P/E valuation in more than three years.
