(Bloomberg) — Stocks fell ahead of Friday’s jobs report as a rally in oil amid geopolitical tensions triggered a flight to the safest corners of the market. Treasuries climbed and the dollar ended near session highs.
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The S&P 500 dropped 1.2%, erasing gains. Brent crude topped $90 a barrel as Israeli Prime Minister Benjamin Netanyahu said at a security cabinet meeting his country will operate against Iran and its proxies and will hurt those who seek to harm it. President Joe Biden told Netanyahu on a call that US support for his war would depend on new steps to protect civilians.
“The real issue lies in the reason WHY oil is rising again,” said Matt Maley at Miller Tabak + Co. “If we get a direct conflict between Israel and Iran, that’s something that will likely restrict the supply of oil coming from the Middle East. That has not been an issue up until now, but it could become one very quickly.”
Bond yields dropped across the US curve — even after Federal Reserve Bank Minneapolis President Neel Kashkari said rate cuts may not be needed this year if progress on inflation stalls. He was among the more than a half-dozen central bank officials speaking ahead of the release of the March jobs data.
Healthy US employment gains likely continued in March while wage growth moderated, according to a Bloomberg survey of economists. Payrolls are seen increasing by at least 200,000 for a fourth straight month. Average hourly earnings are projected to climb 4.1% from the same month last year, the smallest annual advance since mid-2021.
“As always, the monthly jobs report will have the final say,” said Chris Larkin at E*Trade from Morgan Stanley. “Investors will be looking for a ‘Goldilocks’ number that won’t give the Fed any reason to delay rate cuts, but also doesn’t suggest the labor market is taking a serious downturn.”
A survey conducted by 22V Research shows there’s no clear consensus on the market reaction to Friday’s jobs report. Among the investors surveyed, 29% think the response will be “risk-on,” 32% said “risk-off,” and 39% are betting on a “mixed/negligible” reaction.
“Average hourly earnings has supplanted payrolls as the most important labor indicator,” said Dennis DeBusschere at 22V. “That’s consistent with inflation being investors’ biggest concern. But investors are also watching labor data the closest.”
Bond investors are strongly inclined to buy Treasuries on any selloff resulting from the March employment data, according to a survey conducted by Vail Hartman and Ian Lyngen at BMO Capital Markets.
They found that 57% of respondents would buy if Treasuries fall after the release. If bonds rally following the report, around two-thirds of investors said they’d do nothing.
Countdown to Jobs Report:
The market will be sensitive to any data point that hints at greater inflation in the pipeline. Job creation that is in-line or even slightly below estimates would provide some comfort, as would a softer reading on hourly wages.
A single month of data isn’t that important in the grand scheme of things, but current market psychology is starting to tilt away from the notion that the downward trajectory of inflation is intact, so data that reigned the narrative back in place would support the markets.
We look for payrolls to have lost further momentum in March, with the series printing just below the 200,000 mark.
A below-consensus print could lead to a ‘bull steepening’ in rates — as market pricing for rate cuts rebounds. Fedspeak has signaled an emphasis on inflation data over growth data, but Chair Jerome Powell noted the “two-sided risks” of their policy. We expect to see a larger market repricing on a weaker print than a stronger reading.
While the market is likely to react to even modest deviations from consensus, our sense is that it will take a large upside or downside surprise to sustainably change futures market expectations for three 25 basis-point cuts in the fed funds rate this year.
Weighing the data and our internal models, the leading indicators point to a slightly above expectation reading in this month’s nonfarm payrolls report, with headline job growth potentially coming in somewhere in the 200,000-250,000 range, albeit with a big band of uncertainty given the current global backdrop.
March’s employment situation report is broadly expected to reinforce the ongoing resilience of the labor market, which has continued to afford the Fed sufficient flexibility to push its higher-for-longer agenda.
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