Data overview: key outlook on Thursday’s ISM manufacturing and Friday’s employment

  • Stocks remain in a downtrend, as evidenced by the recent rejection of the S&P 500 at its 200-day moving average
  • The Fed wants to see evidence of a broader cooling. Thursday’s manufacturing ISM and Friday’s jobs reports are policy-critical
  • Goldman Sachs and BofA expect robust employment figures and a drop in the unemployment rate

Markets continue to slide after a backlash to Chairman Jerome Powell’s direct message last Friday. Shares traded lower to top last week and a further pullback from the mid-August high. On August 16, it climbed up to its downward sloping 200-day moving average to test another key trend indicator – the 50-day moving average. After warm and more upbeat data on Tuesday morning, pressure mounted on the Fed.

S&P 500: decline from the 200-day moving average, 50-day test

Source: Stockcharts.com

All of this upside price action is happening during what is often a volatile time for stocks. September is known for its strong corrections before a seasonal year-end rally. This time we are entering this perilous period within a larger downtrend, which technicians may point to as cause for concern. Will we have fundamental catalysts to drive stocks down? This possibility is on the table with some big economic data points about to cross the wires.

All eyes on Thursday’s ISM manufacturing report, Friday’s August NFP

Bank of America estimates.

Source: BofA Global Research

The comes at 10 a.m. ET on the first business day of each month. Fifty is the dividing line between economic expansion and contraction. According Bank of America Global Research, the consensus expectation calls for 52.1. While this suggests growth in August, it would be down from July’s 52.8. Last month’s reading is particularly impactful in light of mixed Fed regional survey data lately.

Regional Economic Activity Turns South: To Powell’s Delight

Regional indices of economic conditions.

Source: Yardeni Research

Then on Friday, before the three-day weekend, the is released. Economists expect 300,000 non-farm payrolls to have been added in August, although the White House tried to temper expectations in a statement Tuesday afternoon.

Recall about a month ago when the July NFP report showed a huge employment jump to +528,000 jobs. What will be fascinating to watch is the . BofA Global Research and Goldman Sachs Investment Research recommends a drop in the overall rate from 3.5% to 3.4%. This is not what the Fed wants to see.

Goldman Sachs: What to expect from the August jobs report

Goldman Sachs job estimates.

Source: Goldman Sachs Investment research

By digging into the details of the NFP perspectives, Goldman also expects a high number of private payrolls. At +325,000, that would be above consensus, although still well below July’s hot number. In my opinion, the key indicator will be the earnings barometer. While Powell and the rest of the FOMC want to see the labor market cool down, they mostly want to avoid any form of price-wage spiral. An increase in August BLOWS report is not a good sign on that front.

Thus, keep an eye on and in the NFP data. Goldman sees month-over-month average hourly gains come in at +0.35%, which would be a bit below consensus and down from July’s +0.5%. The consensus expectation for hours worked is 34.6, per BofA.

The essential

It is difficult to predict the main economic data. We can, however, look for clues in stock market trends and positioning to gauge market reaction. Right now, stocks remain in a downtrend, but we have a nice June low in place. The seasonality suggests greater volatility ahead until early October with the all-important midterm elections upon us.

Disclaimer: Mike Zaccardi does not hold any of the titles mentioned in this article.

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