The big question for market participants on Friday morning is whether economic news and the coming earnings season are going to push the indexes back down to the lows they hit a week ago. There was an energetic bounce on Tuesday and Wednesday, but the momentum has fizzled out and now there is potentially market-moving news on the horizon.
The first issue the market will confront this morning is the September jobs news. Nonfarm payrolls are anticipated to increase by around 250,000 and the unemployment rate is expected to remain around 3.7%.
Bulls hope for softness in the number, which would help to advance the thesis that the economy is already slowing, which in turn will cool off inflation and allow the Fed to pivot to a more dovish stance sooner rather than later. It is a logical argument, but the problem is that the Fed has already made it clear that it is going to take a series of weaker economic reports before it relents in its battle against inflation. There has been a parade of Fed speakers recently saying that they are going to remain hawkish for the foreseeable future.
A related issue is that even if the economic data do weak, we then are confronted with the potential of a recession. The market has been focused on the issue of inflation, but has it priced in substantial economic slowing?
A good illustration of the problem with the economic cycle cooling off and heading into a recession is the semiconductor sector. Advanced Micro Devices (AMD) lowered its revenue and gross margin guidance due to slowing demand in the PC sector. This sector is economically sensitive and has an inventory glut due to over-ordering during the supply change crisis, and it now is seeing demand slow. The issue is whether these factors have been priced into the market already. There are a slew of target cuts for AMD, but the stock is holding up fairly well right now.
After the market digests the employment report this morning, we head into the Consumer Price Index (CPI) report next week and the start of earnings season with a number of large banks reporting. Technicians will be watching to see if last week's lows can hold. If they do, that may help to deliver upside during earnings season, but there is little reason to be confident that this market has hit a solid low.
Jobs news hits at 8.30 am ET, and we will see how the market handles the news. A weak report may not be as positive as many bulls hope.