A 25 basis point rate cut in September or 50 basis points? Non-farm payroll data this week may be decisive

The U.S. market will kick off trading in September after the Labor Day long weekend, with stock and bond investors awaiting an important employment report.

Victoria Fernandez, Chief Market Strategist at Crossmark Global Investments, said in an interview that from a market perspective, the U.S. employment report scheduled for release on Friday will be an "important" report. She mentioned that the August job growth and unemployment rate could impact stocks and bonds.

Following July's employment data falling below Wall Street expectations and the unemployment rate rising to 4.3%, U.S. stocks experienced a sharp decline in early August. However, they have recently rebounded from the slump, with the Dow hitting a historic high last Friday, while the S&P 500 index closed 0.3% below the historical high set on July 16.

Bob Elliott, Co-Founder, CEO, and CIO of Unlimited Funds, said over the phone, "The overall economy in the U.S. remains quite strong. But whether the outlook is a soft landing, hard landing, or no landing at all, there is currently no consensus."

Federal Reserve Chairman Powell stated in his speech at the Jackson Hole Symposium on August 23 that the labor market "has cooled significantly from its previous overheated state" and that "the downside risks to employment have increased." Investors are now closely monitoring the labor market. With inflation rates significantly decreasing from their peak in 2022, Powell has signaled a rate cut.

Phil Camporeale, Portfolio Manager of Global Allocation Strategies at Morgan Stanley Asset Management, mentioned that the highly anticipated employment report to be released on Friday could be the "decider" for the Fed on whether to cut the benchmark interest rate by 25 basis points or 50 basis points at the September policy meeting.

Camporeale expects that the employment situation in August will be stronger than in July, potentially preparing the Fed to gradually cut rates starting in September, with each cut being 25 basis points. He noted that a larger rate cut would exacerbate concerns about the labor market and the economy.

Barclays analysts forecasted in an August 29 U.S. economic research report that the unemployment rate in August will drop to 4.2%. They stated, "We believe this will partially alleviate concerns about the unemployment rate, as part of the reason for the spike in July's unemployment rate was the increase in temporary unemployment due to Hurricane Berly." They also predicted that job growth will be stronger than in July.

Camporeale believes that a "strong employment report" could drive U.S. Treasury yields higher and lead to a stock market rebound.

Roger Hallam, Global Head of Rates at Vanguard, stated that while the U.S. labor market has recently slowed down, it is currently "not weak." However, he added: "If the labor market report on Friday shows a downside surprise, the threshold for the Fed to cut rates by 50 basis points in September may be relatively low." And "if we see relatively favorable economic data, bond yields may rise."

At the same time, data from the Chicago Mercantile Exchange (CME) FedWatch tool last Friday showed that traders in the federal funds rate futures market are pricing in a 100 basis point rate cut by the Fed this year.

For Camporeale, this is " a bit too aggressive." He said: "If this happens, the Fed seems to be responding to growth fears, similar to the market anxiety that intensified after the unexpectedly weak July employment report."

Elliott believes that "it is questionable whether the economy needs any rate cuts" because the economic performance is "quite good," asset prices are "hitting historical highs," and despite Fed rate hikes, the inflation rate remains "slightly" above the 2% target.

Camporeale maintains an "overweight" position on stocks, especially the U.S. stock market. He said he recently increased holdings in major indices like the S&P 500 because he expects market breadth to strengthen during the rebound. In terms of fixed income, he said he favors high-yield corporate bonds, which are rated below investment grade and can bring additional returns to the portfolio.

Camporeale said: " The likelihood of an economic recession is still very low. Consumers continue to show resilience, supporting the economy, while inflation data continues to ease in the right direction."