The July labor market report takes center stage this week. Investors and markets brace for significant economic releases that will influence future Federal Reserve rate decisions.
Tuesday provided a glimpse at a decrease in the number of job vacancies throughout June. Wednesday’s ADP employment change will serve as a more substantial preview of the highly anticipated jobs report on Friday.
Investors estimate 190,000 monthly job creations in the private sector, according to ADP. The Bureau of Labor Statistics projects some 200,000 new non-farm payrolls.
If economists’ forecasts align with the data, it would result in the lowest ADP employment growth since March 2023, declining by over 307,000 compared to the previous month’s increase. For non-farm payrolls, it would be the lowest reading since December 2020 once again. The unemployment rate is expected to remain unchanged at 3.6%, near a multi-decade low, and wage growth is predicted to ease by 0.2 percentage points to 4.2% year-on-year.
The July labor market data will have an impact on market expectations regarding Federal Reserve rate hikes.
Stronger-than-expected job growth combined with rising wages may lead investors to anticipate potential rate hikes in September. Conversely, lower-than-expected data could solidify the current solid expectations for a pause in rate increases.
Currently, investors are assigning an 82% probability of unchanged rates in September, according to Fed futures prices.
The following five ETFs listed below could experience increased volatility if the labor market data surprises economists’ estimates.
- iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT)
Interest rate expectations influence long-dated Treasury bonds. A stronger-than-expected July job report could potentially exert a negative impact on the TLT ETF. Bond prices will decrease, as investors raise their Fed hike expectations. A weaker-than-expected job report could have the opposite effect: an increase in bond prices and a decline in yields.
- Invesco DB USD Bullish Fund ETF (NYSE:UUP)
The value of the U.S. dollar is closely tied to the interest rates set by the Fed. A growing economy, with a healthy job market and accelerating inflation, usually supports the dollar. Investors expect a rising interest-rate environment. This can make dollar investments more attractive, thereby increasing demand for the currency.
- Invesco QQQ Trust (NASDAQ:QQQ)
Tech stocks are highly sensitive to changes in the labor market and inflation. This is primarily due to the impact of interest rates on the sector’s growth trajectory. Tech stocks prosper in a “not too cold, not too hot” labor market where employment and wage growth are balanced. This scenario may benefit the Nasdaq 100 index because it minimizes economic uncertainty and concerns about prospective interest rate hike.
- iShares Russell 2000 ETF (NYSE:IWM)
A stronger job market is good news for small-cap stocks. It indicates a healthy economy with higher consumer confidence and increased demand for goods and services, benefiting these companies. Conversely, softening labor conditions can be indicative of a growth slowdown. This can negatively impact small-cap stocks as they may face challenges with reduced consumer spending and declining sales.
- SPDR Gold Trust (NYSE:GLD)
Gold’s value is susceptible to Fed interest rate rises, falling during periods of strong economic growth and rising interest rates. When the dread of a recession grows, gold becomes a sought-after safe haven, offering a buffer against economic instability. A stronger job market is often regarded as an anti-recession hint. It tempers positive price movements in gold. A negative job report, on the other hand, is typically regarded as a favorable event for gold.
Produced in association with Benzinga
Edited by Jason Reed and Kyana Jeanin Rubinfeld
