Traders Bet Aggressively On Rate Cuts Ahead Of Jobs Data: 5 ETFs To Watch This Week

Investors anticipate the release of critical labor market data between Wednesday and Friday, heightening their expectations for aggressive rate cuts by the Federal Reserve.

Expectations for a 50-basis-point rate cut at the Sept. 18 Federal Open Market Committee (FOMC) meeting slightly increased during Tuesday’s trading, as manufacturing surveys revealed further contraction in activity for August.

Market-implied probabilities for a half-percentage-point rate cut this month rose to 37%, up from 30% last Friday, according to data from CME FedWatch.

Market participants are factoring in approximately 90 basis points — or nearly a full percentage point — of rate cuts across the next three FOMC meetings by December 2024.

Labor Market Data to Watch This Week

A significant wave of economic data will offer traders critical insights on the state of the labor market:

• Wednesday: Job openings and quits for July, a month that saw a cooling employment landscape. Economists predict a slight decrease in job vacancies from 8.18 million to 8.10 million.
• Thursday: At 8:15 a.m., the ADP will release private payroll data for August, with expectations for job growth to increase from July’s 122,000 to 145,000. Additionally, the weekly jobless claims report is expected to show a stable reading around 230,000.
• Friday: The official August jobs report will be released, with nonfarm payrolls expected to rise significantly from 114,000 in July to 160,000 in August. The unemployment rate is anticipated to dip from July’s 4.3% to 4.2% in August. Pay growth is also projected to improve. Average hourly earnings are expected to increase by 0.3% month-over-month, up from the previous 0.2% pace.

5 Key ETFs To Monitor

Markets are likely to react strongly to the August jobs data. Last month, equity markets suffered a significant blow due to cooler-than-expected employment growth. There was also an unexpected surge in the unemployment rate in July.

A similarly disappointing report for August could further elevate bets on a larger rate cut during the September FOMC meeting. Conversely, if the data shows that labor market conditions remain robust and that July’s negative trends were temporary, traders may temper their expectations for aggressive Fed rate cuts.

Here are five exchange-traded funds (ETFs) to keep an eye on:

• iShares 20+ Year Treasury Bond ETF TLT: A rise in TLT could indicate cooler-than-expected jobs data and increasing rate cut expectations. For instance, TLT surged 3% on Aug. 2 following the July jobs report.
  
• Invesco DB USD Index Bullish Fund ETF UUP: This ETF, tracking the dollar’s performance against a basket of currencies, could decline in response to disappointing jobs data. On Aug. 2, UUP dropped 1%, marking its worst session of the year.
  
• SPDR S&P 500 ETF Trust SPY: The U.S. stock market is highly sensitive to labor market data, as employment trends influence consumer spending, a key driver of corporate growth. SPY fell 1.9% on Aug. 2.
  
• iShares Russell 2000 ETF IWM: Small-cap stocks are particularly vulnerable to labor market fluctuations, as a rising risk of recession could significantly impact investor sentiment toward smaller businesses. IWM plummeted 3.5% on Aug. 2.
  
• United States Oil Fund USO: Oil prices, which are closely tied to U.S. labor market developments, may also see movement. The July jobs report’s cooler-than-expected results led to a 3.8% drop in West Texas Intermediate (WTI) light crude futures, as tracked by the USO ETF.

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