S&P 500 weekly: What to expect for US October job report?

What to expect for US October non-farm payrolls data this week?

Current expectations are for the US to add 108,000 jobs in September, which will reflect some moderation in job growth from the previous 254,000. However, some labour weakness may be attributed to temporary distortions from Hurricane Helene and Milton, along with strikes in the aerospace manufacturing industry (Boeing) and hotel industry (Hilton, Hyatt, and Marriott) during the period, which could obscure the underlying trend in the US labour market.

These short-term events may temporarily weigh on jobs in the hospitality, construction and manufacturing sector, but we may see some eventual shrug-off from markets in the likes of what we saw with Hurricane Beryl in July this year, as conditions normalise over time. When US jobs data disappointed in July and August this year, dips in the S&P 500 were short-lived as the broader economic picture still presented resilience.

US unemployment rate is expected to remain unchanged at 4.1% in October. Even at 4.3% back in July this year, Federal Reserve (Fed) Chair Jerome Powell said that it is “still low by historical standards”, which suggests a 4.1% unemployment rate remains well within the range of sustainable employment levels by the Fed. Aside, average hourly earnings for October are expected to ease slightly to 0.3% month-on-month, versus the previous 0.4%.

What does it mean for Fed’s policy outlook?

US economic conditions have been surprising on the upside over the past two months, which suggests that the Fed can afford to go slow with its easing process over subsequent meetings. The US economic surprise index is now at its highest level in April 2024. US September consumer prices have also shown an unwanted uptick in core inflation for the first time since March 2023, which suggests that the Fed will likely have to tread carefully to mitigate the risks of an inflation resurgence.

The Fed may take the upcoming US job report into consideration when determining its rate cut in November. However, given potential distortions in the upcoming job numbers and uncertainties around the US elections, the Fed may likely follow through with its initial guidance for further 50 basis points (bp) of cuts by the end of this year to retain their credibility (likely a 25 bp cut in November and December).

It may have to take a more severe downturn or substantial job market cooling ahead in order to prompt the Fed to react with more aggressive cuts. This could potentially be a surge in unemployment rate above 4.4%, which will then exceed the Fed’s own economic projection for 2024. Otherwise, if the current trend of upside economic surprises continue, we may see policymakers put a rate hold back on the table into 2025, which may further support the US dollar.

S&P 500: Awaiting fresh catalyst to retest previous record high

There are not much big moves in the S&P 500 lately, with market participants in waiting mode ahead of several key risk events (Magnificent Seven stocks’ earnings, US elections), which may limit risk-taking for now. Despite Treasury yields surging to its highest level in two months in what is traditionally a headwind for equities, the S&P 500 currently trades less than 2% away from its previous record high, reflecting the broader theme of a Trump’s return to the White House as the key driver.

Thus far, the S&P 500 remains on a broader upward trend, with a rising channel pattern in place since October 2023. Any near-term retracement may leave the previous resistance-turned-support at the 5,674 level on watch as immediate support to hold. A stronger support confluence may however be at the 5,435 level, where its lower channel trendline stands alongside its daily Ichimoku Cloud zone and 200-day moving average (MA). On the upside, a move above its October high may leave the psychological 6,000 level on watch as the next resistance to overcome.

Levels:

R2: 6,000
R1: 5,873

S1: 5,674
S2: 5,435