As the United States releases its latest employment report this Friday, Bank of America points out that the biggest risk facing US stocks this week is a stronger than expected August non farm payroll report.
The bank emphasized this risk in a report on Monday, stating that overheated employment data will reprice the expected rate cuts for this year.
Ohsung Kwon, a strategist at Bank of America, said, "Judging from the recent return of the stock market to near highs and the excellent performance of small cap stocks and the equally weighted S&P 500 index, the stock market seems more excited about interest rate cuts than concerns about a potential economic recession
If this is true, then the main risk facing the stock market this week is the hot performance of the non farm payroll report, which will reprice short-term interest rates, "he added.
At 20:30 Beijing time on Friday, the United States will release its August non farm payroll report. Economists predict that the United States added 162000 new jobs last month, and the unemployment rate dropped from 4.3% to 4.2%.
Bank of America economists predict that there will only be two 25 basis point interest rate cuts this year. The Chicago Mercantile Exchange's FedWatch tool shows that the market expects the Federal Reserve to cut interest rates by 100 basis points this year, reaching a "recession scale".
If the US economy rebounds strongly from the weak July employment report, it could drive a change in market sentiment and prove investors' overconfidence in the Fed's path to rate cuts.
The Bank of America report points out that this may bring downward pressure to the stock market. Kwon suggests that investors use the October put option spread on the S&P 500 index to hedge against downside risks.
Recent signs of economic resilience include an upward adjustment of GDP growth rate from 2.8% to 3.0% in the second quarter, as well as robust personal expenditure data with a month on month increase of 0.5% in July.
The continued performance of the US economy has proven skeptics wrong. Compared to last year, economic growth has indeed cooled down, but this is a gradual process, "said Bank of America.
Long term Wall Street bulls and the president of investment consulting firm Yardeni Research, Ed Yardeni, also expect a hot employment report to be released on Friday. He stated in his report to clients on Monday that he expects an increase of 200000 to 225000 job positions in August.
If Yadni's prediction is accurate, it will exceed the general expectations of economists, thus confirming the view that the Federal Reserve does not need to cut interest rates as much.
The Federal Reserve is unlikely to quickly and significantly lower the federal funds rate like previous monetary easing cycles, when the financial crisis triggered credit tightening and economic recession, "said Yadni.
Although Yadni's optimistic view is good news for the economy, it may have a negative impact on the US stock market in the short term.