Payrolls, Quarterly Corporate Results, and German Politics

Investing.com — The upcoming monthly jobs report at the end of the week is generating significant interest, as investors anticipate this month’s Federal Reserve meeting and a possible rate cut. The quarterly earnings season is nearing its end and has exceeded expectations. Additionally, political dynamics in Germany appear more fragmented following recent state elections.

### 1. Payrolls to Influence Fed Easing Plans

This week’s major economic release will be Friday’s jobs report for August, as investors seek insights into how aggressively the U.S. Federal Reserve might ease monetary policy later this month. Fed Chair Jerome Powell has indicated that it is time to begin reducing interest rates, and many market participants expect a 25-basis point cut at the Fed’s meeting on September 17-18.

However, any significant weakening in the labor market could reignite recession fears, which unsettled markets in late July and early August, potentially leading to a more substantial rate reduction. A jobs report that aligns with forecasts of a 164,000 increase and a 4.2% unemployment rate could diminish the likelihood of a 50-basis point cut, although an exceptionally strong report is required to convince markets to abandon the expectation of a 25-basis point reduction.

Ahead of Friday’s report, other labor market updates are scheduled, including Wednesday’s Job Openings and Labor Turnover Survey (JOLTS) and Thursday’s data on private sector hiring from ADP, along with weekly initial jobless claims.

### 2. Futures Dip on Labor Day

Wall Street is closed on Monday in observance of Labor Day, leading to limited market activity ahead of crucial labor data later in the week.

As of earlier this morning, futures contracts were down slightly, with the Dow futures falling by 90 points (0.2%), the S&P 500 dropping by 15 points (0.3%), and the Nasdaq decreasing by 75 points (0.4%). The major indices have rebounded to near record levels following a dip in early August, fueled by expectations that the Federal Reserve is on the verge of easing monetary policy for the first time in years.

Investors largely anticipate a 25-basis point cut in September, but signals of labor market weakness could shift expectations towards a larger reduction. Current futures pricing indicates a complete expectation for a 25-basis point cut in September and a 33% chance for a 50-basis point cut. By December, futures are pricing in 100 basis points of cuts, and 120 basis points by 2025.

Also significant this week are the ISM surveys and trade data, as well as speeches from various Fed officials.

### 3. S&P 500 Reports Notable Q2 Earnings Growth

The second-quarter earnings season is mostly complete, with just seven companies in the S&P 500 yet to report. So far, the index has recorded a 13% earnings growth rate for the quarter, representing the strongest earnings growth since Q4 2021.

Key sectors such as technology, financials, and healthcare have each seen earnings growth surpassing 20%, with materials and real estate being the only sectors to report contractions. There has been a rotation within the index, with more stocks participating in the rally, a positive sign for investors concerned about reliance on technology shares.

According to recent data, 61% of S&P 500 stocks outperformed the index over the past month, compared to just 14% in the past year. Meanwhile, the so-called “Magnificent Seven” tech giants have lagged the other 493 stocks in the index by 14 percentage points since a disappointing inflation report was released on July 11, as noted by BofA Global Research.

### 4. Shifting Political Landscape in Germany

Recent state elections have complicated Germany’s political scene. The Alternative for Germany (AfD) party became the first far-right party to secure a seat in a state legislature in Germany since World War II, achieving noteworthy results in Thuringia and Saxony.

Chancellor Olaf Scholz expressed concern over the AfD’s performance, stating that their ideology is damaging to Germany and detrimental to the economy and social cohesion. The results may lead to increased friction within Scholz’s three-party coalition as Germany approaches a national election next year, complicated further by the AfD’s oppositional stance towards NATO, immigration, and relations with Russia.

The faltering authority of the German government could also impede European policy-making, particularly with France still struggling to establish a government following recent snap elections.

### 5. Decline in Crude Prices Amid Weak Chinese Data

Crude oil prices have continued to slide, reflecting concerns about sluggish demand growth in China alongside expectations for increased OPEC+ production.

As of early morning trading, West Texas Intermediate (WTI) futures fell 0.3% to $73.33 a barrel, while Brent futures declined by the same percentage to $76.68 a barrel. An official survey revealed that Chinese manufacturing activity dropped to a six-month low in August, exacerbating fears about future consumption from the world’s largest crude importer.

Both Brent and WTI have experienced losses recently, extending a trend of weakening prices as demand worries overshadow temporary supply disruptions in Libya and ongoing regional tensions. Investors are also bracing for imminent production hikes from OPEC+ members aimed at reducing their output cuts starting next month, with eight members expected to increase output by 180,000 barrels per day in October.