Investing.com -- All eyes are on the monthly jobs report at the end of the week, as investors look forward to this month's Federal Reserve meeting and a potential rate cut. The quarterly earnings season is drawing to a close, and has been stronger than possible. Elsewhere, politics in Germany looks more fractured after state elections over the weekend.
1. Payrolls to guide Fed easing plans
The week’s key economic data release will be Friday’s August jobs report, as investors look for more clues about how aggressively the U.S. Federal Reserve will ease monetary policy later this month.
Fed Chair Jerome Powell has flagged it is time to start reducing interest rates, and many in the markets expect the process to begin with a 25-basis point cut at the Sept. 17-18 meeting.
However, any signs of a dramatic weakening in the labor market could revive fears over the prospect of a recession that roiled markets in late July-early August, potentially leading to a more aggressive reduction.
A result in line with forecasts of a gain of 164,000 in nonfarm payrolls and a 4.2% unemployment rate would likely see the chance of 50 basis points recede completely, though it would take an extraordinarily strong report to make markets give up on 25 basis points.
Ahead of Friday’s report there are other updates on the health of the labor market, starting with Wednesday’s Jolts job openings report, which also contains data on layoffs. ADP (NASDAQ:ADP) data on private sector hiring will be released on Thursday, along with the weekly report on initial jobless claims.
2. Futures slightly lower on Labor Day
Wall Street is closed Monday, with Americans enjoying the Labor Day public holiday, and activity is likely to be limited ahead of the release of key labor market data at the end of the week.
By 04:05 ET (08:05 GMT), the Dow futures contract was 90 points, or 0.2%, lower, S&P 500 futures dropped 15 points, or 0.3%, and Nasdaq 100 futures fell by 75 points, or 0.4%.
The main indices have bounced back to near-record highs after an early August swoon on expectations that the Federal Reserve is on the cusp of monetary policy easing for the first time in years.
Investors expect a 25 basis point cut at the Sept. 17-18 meeting, but further signs of the labor market weakness at the end of the week [see above] could increase expectations of a larger cut.
Futures are 100% priced for a cut of 25 basis points in September, and imply a 33% probability of 50 basis points. They also have 100 basis points of cuts priced in by December, and 120 basis points for 2025.
Also important this week will be the ISM surveys, JOLTS job openings and ADP employment, trade and the Fed's Beige Book, while speeches from the likes of Fed Governor Christopher Waller and NY Fed President John Williams will also be widely digested.
3. S&P 500 sees strong earnings growth in Q2
The second-quarter earnings season is largely over, with only seven S&P 500 companies yet to report.
So far, the S&P 500 index has reported a 13% earnings growth rate in the quarter, according to financial data firm LSEG, the strongest earnings growth since Q4 2021.
Leading the way, the tech, financials and health-care sectors all saw earnings growth of more than 20%, with only two sectors — materials and real estate — reporting earnings contraction.
The index has also seen a rotation, with a broadening rally offering an encouraging signal to investors worried about concentration in technology shares.
A total of 61% of stocks in the S&P 500 outperformed the index in the past month, compared to 14% outperforming over the past year, Charles Schwab (NYSE:SCHW) data showed.
Meanwhile, the so-called Magnificent Seven group of tech giants have underperformed the other 493 stocks in the S&P 500 by 14 percentage points since the release of a weaker-than-expected U.S. inflation report on July 11, according to an analysis by BofA Global Research.
4. Complicated German politics
German state elections have complicated the political landscape in the eurozone's dominant country.
Alternative for Germany (AfD) became the first far-right party to win a state legislature election in Germany since World War Two with its result in Thuringia, as well as coming a close second in Saxony.
"The results for the AfD in Saxony and Thuringia are worrying," German Chancellor Olaf Scholz said in a statement to Reuters. "Our country cannot and must not get used to this. The AfD is damaging Germany. It is weakening the economy, dividing society and ruining our country's reputation."
With a year to go until Germany's national election, these results could result in infighting amongst Scholz's three-party coalition, given the apparent popularity of AfD’s anti-NATO, anti-immigration and Russia-friendly stance.
The German government's faltering authority could also complicate European policy when the bloc's other major power, France, is still struggling to form a government after snap elections in June and July.
5. Crude falls after weak Chinese data
Crude prices fell Monday, extending recent losses on concerns of sluggish demand growth in China as well as expectations for higher OPEC+ production.
By 04:05 ET, the U.S. crude futures (WTI) dropped 0.3% to $73.33 a barrel, while the Brent contract fell 0.3% to $76.68 a barrel.
An official survey showed on Saturday that Chinese manufacturing activity sank to a six-month low in August, following on from a weak performance in the second quarter, raising concerns about future consumption at the world’s biggest crude importer.
Both Brent and WTI posted losses last week, adding to two consecutive weaker months as these demand concerns have outweighed recent disruptions in Libyan oil supply and tensions in the oil-rich Middle East.
Investors are also looking ahead to planned oil output hikes from members of the Organization of Petroleum Exporting Countries and allies, known as OPEC+, next month.
Eight OPEC+ members are scheduled to boost output by 180,000 barrels per day in October, as part of a plan to begin unwinding its output cuts.