U.S. NFP Preview: Stocks at Risk if Warm Jobs Data Cools Fed Rate Cut Bets

Upbeat U.S. jobs data might hurt stocks if Fed rate cut expectations come down further.

• Stocks swoon as solid earnings from tech champions fail to cheer the markets
• U.S. jobs data now in focus, with traders probably primed for one-off weakness
• The mood on Wall St. may sour further if Fed rate cut speculation cools again

Wall Street was in a sour mood on the last day of October. The bellwether S&P 500 stock index fell over 1.5% to post its biggest daily loss in almost two months. The tech-minded Nasdaq 100 found no solace in another round of solid earnings from its “Mag7” champions, from Microsoft (MSFT) and Meta (FB). It fell over 2.3%.

Against this troubled backdrop, markets now face the crescendo in a blistering week of high-profile economic news: the release of October’s U.S. employment data. It is expected to show nonfarm payrolls rose by a meager 113,000 jobs, the smallest in six months. The unemployment rate is expected to remain unchanged at 4.1%.

U.S. jobs data may surprise markets primed for weakness

Traders may be primed for a weak report, reasoning that Hurricanes Helene and Milton as well as a wave of labor strikes – like those at Boeing – will exact a toll. Such factors are unlikely to weigh in the long term, however. That wages are seen growing 4% year-on-year again, nearly double the rate of inflation, helps insulate consumption and growth.

With that in mind, an upside surprise may be most market-moving. Analytics from Citigroup show that U.S. economic data outcomes have increasingly outperformed relative to consensus forecasts since late August. What’s more, positive momentum has been growing, suggesting reality is outpacing adjustments in analysts’ models.

Leading purchasing managers index (PMI) data from S&P Global reported that U.S. employment conditions improved in October relative to the prior two months. A blistering estimate from Automatic Data Processing (ADP), an HR services giant, said payrolls rose by 233,000 in October, the most since July 2023.

Stock markets may struggle if Fed rate cut bets fall further

Battered stock markets may not take kindly to an upside surprise. Strong jobs growth will probably be met with cheers in the moments after the numbers hit the wires, but a more circumspect perspective might arise after the dust settles and traders weigh what the report might mean for the Federal Reserve.

The U.S. central bank all but promised that it would cut interest rates by a further 100 basis points (bps) this year after its outsized 50bps reduction in September. That implies cuts of 25bps apiece at its meetings in November and December. The recent run of strong economic data has dented confidence in that outlook.

As it stands, the markets have priced in one 25bps down move and a mere 28% probability of another one. The outlook for 2025 has become less dovish too. Interest rate futures imply just 77bps in further easing, down from 123bps in the wake of last month’s Fed policy update. At that time, the central bank itself envisioned 100bps.

Faster than expected jobs growth may cut into rate cut prospects further, pointing to higher borrowing costs ahead than previously discounted just as the markets turn wobbly. The proximity of potent event risk by way of the looming U.S. presidential election may add to the drive to liquidate, sending stock markets reeling.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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