Why is the US Employment Report So Important For Stocks?

TradingKey - Data on global economies is always something closely watched by investors. That’s even more true in the US, the world’s largest economy and home to the world’s largest stock market.

One of the key metrics that investors watch in the US every month is the employment or jobs report. This is officially called the “non-farm payrolls” report and the employment data for the prior month is released on the first Friday of every calendar month.

Essentially, it gives investors a snapshot of how many new jobs have been added in the US during that particular month. As a result, it also give policymakers an indication on the broader health of the economy. The central bank in the US, the Federal Reserve (Fed), uses the jobs report as one of its key metrics that goes into determining its interest rate policy.

The October nonfarm payrolls report is due to be released this Friday (1 November) before the market opens in the US. Here’s what investors should be watching and why it’s so important for the stock market right now.

Last jobs report before key Fed meeting

The October jobs report is an important one in that it’s the last key data point to be released before the US Fed meets next week (6-7 November). That’s when the central bank is expected to cut its benchmark interest rate – the Feds Fund rate – by another 25 basis points (bps), or 0.25%.

The current median projection for jobs growth in October is around 110,000. That would be significantly lower than the 254,000 jobs added in September. However, it should also be noted that many observers believe there will be some labour demand weakness for October given two big hurricanes (Hurricane Helene and Milton) that hit the US during the month. 

Monthly job creation in the US, January 2022 – September 2024

Source: US Bureau of Labor Statistics, CNBC

During the nonfarm payrolls release, the Bureau of Labor Statistics (BLS) also provides updated revisions to its prior months’ jobs data. For example, in the September jobs report – released in early October – the BLS revised up the July payrolls number from 89,000 to 144,000 (an increase of 55,000 jobs) and the August payrolls figure from 142,000 to 159,000 (an increase of 17,000 jobs).

Whether there are revisions upwards (or downwards) to the August and September jobs numbers, on Friday’s release, will also influence the Fed’s overall thinking on the level of interest rates.

How does this impact the stock market?

Right now, investors in the US are concerned of a potential recession given slowing job growth and high interest rates.

The Fed has what’s called a “dual mandate” and this looks to balance both inflation and employment to ensure both are at an optimal level. Now that inflation has come down significantly, the Fed’s attention is shifting towards the health of the jobs market.

Currently, the unemployment rate in the US in 4.1% which is in a manageable range. What has investors worried is whether the persistently high interest rate environment will result in the US economy starting to shed jobs (instead of adding them).

That would hit companies and their earnings, potentially leading to a recession in economic growth for the US economy. Naturally, that would be negative for stock markets and individual stocks, which rely heavily on a strong outlook for earnings growth.

Fed looking to navigate a soft landing 

When it comes to the health of the US economy, many are looking towards the Fed to start cutting interest rates more consistently in the quarters ahead. It is hoping to achieve what is termed a “soft landing” of the economy. This is a scenario where it can gradually cut interest rates without the economy toppling into a recession.

Clearly, this is a hard balancing act for the Fed and it will be looking at the jobs market as a key indicator of how much it needs to cut interest rates at future meetings.

Of course, interest rate cuts would ease the cost of borrowing for companies in the US and would generally be seen a positive move for the stock market. But that comes with a caveat. For it to be a positive, the Fed must enter a cycle of cutting interest rates as inflation remains low and the employment market remains healthy.

A “hard landing” scenario would mean the US economy entering recession and the Fed cutting rates quickly in response to this. That’s not ideal and it essentially means the central bank is reacting to bad economic news and indicators. Unfortunately, that would be negative for the stock market.

Overall, the jobs market is one key metric for investors (and the Fed) in addition to the consumer price index (CPI) data that is usually released in the middle of each month.