US stocks are heading into a crucial week of employment and inflation data that could shape expectations for the Federal Reserve's interest-rate path and test the resilience of the equity market's rally, according to a report by Reuters.
Major US equity indexes ended Friday near record levels, with the S&P 500 less than 1% below its mid-August peak. Technology and artificial intelligence-related stocks have provided much of the support, helping the broader market withstand rising Treasury yields and growing concerns about the outlook for interest rates.
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The September employment report, due on October 2, will be the main focus for investors. A reading on the personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, will also be closely watched for signs that price pressures are easing, the report stated.
According to Reuters, economists expect the September payrolls report to show an increase of 100,000 jobs, with the unemployment rate at 4.2%. The data will be scrutinized for clues about whether the labor market remains strong enough to support further rate increases.
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The Federal Reserve raised interest rates by 25 basis points on September 16 and signaled another increase before the end of the year. Fed funds futures on Thursday indicated a more than 60% probability of a rate hike at the Fed's October meeting, according to LSEG data cited by Reuters.
A stronger-than-expected jobs report could reinforce expectations for another rate increase, potentially putting pressure on equities. Higher rates raise borrowing costs, weigh on economic activity and can make bonds more attractive relative to stocks.
Bond markets are already signaling growing pressure. The 30-year US Treasury yield reached its highest level in more than two decades this week, while the benchmark 10-year yield moved well above the closely watched 5% level.
Despite the rise in yields, the major equity indexes have remained relatively resilient. However, market performance beneath the headline indexes has been considerably weaker.
Eight of the 11 S&P 500 sectors were in negative territory for September, with financials and utilities each down around 5%. The equal-weighted S&P 500, which gives each constituent the same influence and is often viewed as a measure of the performance of the average stock, was down about 4% for the month.
Technology stocks have been an important exception. Semiconductor shares, which have been among the biggest beneficiaries of the AI investment boom, have continued to gain. Micron Technology, whose market value has climbed above $1 trillion, is scheduled to report quarterly results on Wednesday.
The divergence between large-cap technology stocks and the broader market has left investors watching for signs that weakness is spreading beyond individual sectors.
Inflation data could provide another important signal for markets. The monthly PCE report, due Wednesday, is expected to offer fresh insight into the direction of price pressures and the Fed's policy outlook. Core PCE inflation rose 3.3% in the 12 months through July, according to the previous report, remaining well above the Fed's 2% target.
The report by Reuters stated that investors are looking for evidence that inflation is moving closer to the central bank's target. A moderation in PCE inflation could ease some pressure on markets, while a stronger-than-expected reading could reinforce expectations for higher rates for longer.
The combination of the jobs report, inflation data and elevated Treasury yields therefore leaves the stock market facing a key test. While strong economic data can support corporate earnings and consumer spending, data that points to persistent inflation and a stronger case for additional rate hikes could increase pressure on equity valuations.
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