Jobs report, inflation data to test US rate path, economic strength

Investors will examine employment and inflation reports this week to gauge the likelihood of more aggressive interest rate hikes, which could threaten the U.S. stock market's recent rally. Major indices like the S&P 500 are near record highs, driven by technology and AI-related stocks. The upcoming October 2nd employment report and inflation gauge are key events for Wall Street, as they could influence the Federal Reserve's rate decisions.

Jim Baird, chief investment officer, highlights that the Federal Reserve and interest rates are at the forefront of market concerns. Both the employment and inflation reports will provide insights into potential shifts in Federal Reserve thinking. However, rising Treasury yields have presented challenges, with the 30-year yield reaching a 20-year high and the 10-year yield exceeding 5%.

While the broader stock market has remained relatively stable in September, with the S&P 500 up 13% in 2023, individual sectors have faced headwinds. Financials and utilities are among the underperforming sectors. An equal-weight version of the index is down about 4% in September, indicating that the average stock has underperformed the market averages.

Despite the overall strength of the averages, the individual stocks within the market have shown mixed results. The tech sector, particularly semiconductor shares benefiting from the AI trade, has been a standout performer. Micron Technology, a leading memory chipmaker, is set to report quarterly results on Wednesday.

The September employment report is anticipated to show a growth of 100,000 jobs and an unemployment rate of 4.2%, according to a Reuters poll of economists. A steady labor market is crucial for maintaining consumer spending confidence. Baird notes that a solid jobs report would bolster confidence in sustained consumer spending.

The personal consumption expenditures price index (PCE), closely monitored by the Federal Reserve, will provide further clues about inflation trends. The latest report showed the core PCE index increasing by 3.3% over the past 12 months, surpassing the central bank's 2% target. While this confirms ongoing inflation above the target, a slightly lower PCE trend could boost market sentiment.