US markets are closed for Labor Day on Monday, and now the focus turns to labor market data due out later this week.
The jobs report for August, due out on Friday, will be the focus of economic output this week, as investors look to see whether signs of a slowdown in the July jobs report were overblown or an early sign of a broader economic slowdown.
Updates on job openings and private wage growth are also scheduled, along with a survey of activity from the services and manufacturing sectors.
In July, the US economy added 114,000 jobs, well below expectations, while the unemployment rate hit 4.3%, the highest level in nearly three years. The report raises fears of a recession as concerns about labor market weakness grow.
However, in the following weeks, additional data showed that the US economy was still relatively resilient. Jobless claims, the weekly indicator economists use to track the labor market between jobs reports that follow, have reversed the upward trend seen in July.
Many economists believe this indicates that weather-related factors influenced the July employment report, causing weakness in the labor market to be overstated.
Morgan Stanley economist Sam Coffin argued in a note to clients last week that one of the main reasons why the unemployment rate hit 4.3% in July was a large increase in temporary layoffs. As the immediate impact on the Texas labor market from Hurricane Beryl subsides, Coffin doesn't see a repeat.
Coffin and Morgan Stanley's economics team forecast that the unemployment rate will fall to 4.2% while the US economy added 185,000 jobs last month.
Consensus expectations among economists surveyed by Bloomberg forecast the US economy adding 163,000 jobs in August while the unemployment rate fell to 4.2%. This would mark the first drop in the unemployment rate since March.
On Friday, the latest readings for the Fed's preferred inflation indicator showed inflation continuing to ease toward the Fed's 2% target. This, according to economists, puts further pressure on next Friday's jobs report in determining whether the Fed will cut interest rates by 25 or 50 basis points at their September meeting.
"An interest rate cut by the Fed in September is warranted after Chairman Powell's Jackson Hole speech," Nationwide senior economist Ben Ayers wrote in a note to clients on Friday. "But a further cooling of inflation could give the Fed leeway to be more aggressive in its rate cuts at future meetings, especially if the labor market shows a significant deterioration."
As of early Tuesday, the market expected a 31% chance that the Fed would opt for a 50 basis point interest rate cut versus 25 basis points at their September meeting, according to the CME FedWatch Tool.
Still, traders have assumed a full percentage point interest rate cut by the Fed this year. With only three meetings left this year, this means the market is expecting a bigger tapering by the Fed at one of the remaining meetings.
