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Wall Street week ahead: Jobs data could spur Fed action on stimulus

by Editor

August 31, 2013 | 2:08 pm
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Wall Street is bracing for a wave of economic reports next week, including the August jobs report, which might prove decisive in determining whether the economy is strong enough for the Federal Reserve to dial back its bond purchases in mid-September.

Anxiety about the Fed possibly reducing its $85 billion monthly stimulus, also known as QE3, has hurt the stock market which recorded its steepest monthly fall since May 2012, Reuters reports.

But the stock market’s greater anxiety, which has developed in recent weeks, is that the Fed will press ahead with a reduction in support, even as the economy remains fragile. The recent data has failed to provide evidence of the convincing growth the Fed says it wants to see. Until then, stocks will benefit from the cheap money resulting from the Fed’s bond purchases.

“Next week’s data should make or break the September expectations,” said Mike O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.

A strong jobs report will likely reinforce the view the Fed will opt to decrease its bond purchases at its September 17-18 meeting, while a weak one would do the opposite, analysts said.

“From a real economy perspective, QE3 has done very little. From a financial markets perspective, it has had a major influence. If it is really not helping the real economy beyond pushing financial assets higher, there is no point in continuing the risk of increasing the balance sheet,” said O’Rourke.

For the month, the Standard & Poor’s 500 index fell 3.1 percent in August; the Dow Jones industrial average lost 4.4 percent and the Nasdaq slipped 1 percent.

Speculation on the timing of Fed action has triggered a bond market sell-off that sent mortgage rates to two-year highs. The surge in home borrowing costs this summer has shown signs of slowing the housing recovery. Analysts also are watching if the higher rates have discouraged employers from adding workers.

Economists polled by Reuters forecast domestic employers likely hired 180,000 workers in August, more than 162,000 in July, while the jobless rate likely held steady at 7.4 percent, which is a four-year low.

Deutsche Bank economists said that if the payrolls figure exceeds 190,000 and the unemployment rate falls to 7.3 percent, they expect the Fed will start cutting bond purchases. “August employment would have to meaningfully disappoint for the Fed to back away from the timetable presented by Chairman Bernanke in the June post-meeting press conference,” they wrote.

Prior to the payrolls data on Friday, traders will face a heavy schedule of economic releases after the three-day holiday weekend. They include the latest readings on vehicle sales and national factory and service activities.

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by Editor

August 31, 2013 | 2:08 pm
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