With bullish investors pinning their hopes on a rebound in U.S. and global growth, few appear prepared for a second dismal jobs report in a row.
The strength of U.S. households has been a widely shared article of faith among stock-market investors betting on the economy to power through its recent trough, helping equities and corporate bonds rebound strongly in the first quarter. This conviction helped Wall Street shrug off fears February’s unusually soft jobs data was a portent of economic trouble.
But if nonfarm payrolls, which are due for release Friday morning, come in much weaker than expected in March, it could help unravel investor optimism that the U.S.’s recent slowdown is only a soft patch.
“If we get anything remotely close to the 20,000 gain in February, that would be a very big concern to markets, and it would suggest the slowdown is deeper and more persistent than expected,” Kathy Bostjancic, director of U.S. macro investor services at Oxford Economics, told MarketWatch.
See: U.S. adds meager 20,000 jobs in February to mark smallest increase in 17 months
Economists polled by MarketWatch forecast the U.S. economy to add 179,000 jobs in March, jumping back from a 20,000 reading in February. Average hourly earnings are expected to increase 0.3%, and the unemployment rate to hold steady at 3.8%.
Fears of softening household spending and a rise in unemployment briefly flashed after Automatic Data Processing Co. reported Wednesday that private-sector employers had added 129,000 jobs in March, versus the forecast of 179,000.
“If employment growth weakens much further, unemployment will begin to rise,” wrote Mark Zandi, chief economist of Moody’s Analytics.
Read: Private sector hiring falls to 18-month low, and manufacturing sheds jobs, ADP says
If “this is the beginning of a weakening of the labor market, the discussion all of a sudden changes rather quickly because we know the U.S. consumer is mostly keeping the economy afloat,” said Peter Boockvar, chief investment officer at the Bleakley Advisory Group, in a Wednesday note.
The ADP private payrolls data is not closely correlated with Friday’s official jobs report, though significant economic ‘misses’ in the ADP data does hold more predictive power for the nonfarm payrolls numbers, according to Goldman Sachs analysts.
Still, Wall Street is on high alert for signs of softer U.S. growth since a sharp decline in long-dated Treasury yields in recent weeks set off recession concerns. A slump in bond yields can indicate bond buyers hold muted expectations of growth and inflationary pressures.
The 10-year note yield TMUBMUSD10Y, -0.07% plunged so low that it pushed below the 3-month bill TMUBMUSD03M, -0.11% on March 22, touching off recession concerns as an inversion by that measure has come before the nine last recessions since 1955. Bond prices move in the opposite direction of yields.
Stock-market investors appear to be looking past the economic pessimism signaled by the bond market, with many looking for economic activity in U.S. and China to rev up later in the second quarter. Those hopes gained ground following a rebound in manufacturing purchasing managers indexes in the U.S. and China, sending stocks and bond yield higher for the week.
For the week, the S&P 500 SPX, +0.21% is up 1.3%, and the Nasdaq Composite COMP, +0.60% is up 2.1%. And the 10-year benchmark yield has advanced more than 10 basis points in the last three trading sessions to settle above 2.50%, for the first time since March 22, FactSet Data show.
Against a backdrop of increased appetite for risk assets and subdued demand for safety, investors risk being caught offside from another disappointing jobs report, which could hurt equities and buoy bonds.
To be sure, many market participants are already expecting a steady downtrend in payrolls in line with the aging expansion of the U.S. economy. With unemployment rates near multidecade lows, the chance of the U.S. economy posting a 200,000-plus job report appears dim, they said.
“That might simply reflect the fact that we’re running out of people to employ,” said Jim Solloway, chief investment strategist at SEI Investments, in an interview with MarketWatch.
And among those who are optimistic on the ability of the global economy to stabilize later this year, a soft nonfarm payrolls number is unlikely to derail the narrative that the U.S.’s slowdown will bottom out after a subdued first-quarter, as long as February’s jobs data were shown to be an aberration.
“Markets are looking for data confirming that there hasn’t been something more caustic that’s happened to the economic backdrop,” Matt Toms, chief investment officer for fixed income at Voya Investment Management, told MarketWatch.
Providing critical information for the U.S. trading day. Subscribe to MarketWatch's free Need to Know newsletter. Sign up here.