Friday's Market Minute: Investors Remain Cautious Before the Labor Market Report

Markets are volatile, inflation is persistent, and recession risk looms, so investors have plenty of reasons to be concerned. Given tighter financial conditions and a higher Fed funds rate, the path to a soft landing continues to narrow. Equity markets erased early gains yesterday, closing in the red as investors took a cautious approach ahead of today’s jobs report.

The Fed has had a consistently hawkish tone, and it likely will stay that way after the labor report despite a potential uptick in the unemployment rate. The labor market is still quite strong even as jobless claims rose from five-month lows. Initial unemployment insurance claims rose by 29,000 to 219,000 in the week ending October 1, higher than the consensus estimate by 15,000. However, one week of data does not make for a change in trend when it comes to expectations of weakness in the labor market. 

It may take a weaker-than-expected jobs report and below-consensus data from next week’s Consumer Price Index report to potentially make for a meaningful countertrend rally based on lower interest rates as the economy softens. It's worth noting that there has been a clear past correlation between recessions and a weak labor market, which has not held today.

The productivity component of GDP peaked in 4Q 2021, which is the reason the economy is in a technical recession despite a full employment economy. Considering that the labor market and other signals remain strong, some argue that investors have been too quick to sell stocks and that a rebound is likely on the way. On the other hand, others argue that the current market correction started from a record high P/E ratio and that the macro picture looks worse than it has in years, meaning that there's potentially more room to fall.

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