Market Highlights for the Week: Rates, Market, Oil

Friday’s August employment report will focus attention on the short holiday week as markets anticipate the Federal Reserve to start cutting rates later this month. Meanwhile, the Bank of Canada is set to implement another rate cut, oil prices will remain under pressure, and China will release new manufacturing data. Here is a look at what will happen in the markets this week.

Nonfarm Payrolls

The Federal Reserve is preparing to cut interest rates for the first time in years, so investors will be focused on Friday’s August jobs report for signs of how aggressively the central bank might act.

Fed Chairman Jerome Powell has indicated that now is the time to begin cutting interest rates, and many in the markets anticipate the process to begin with a 25 basis point cut at the next meeting on September 17-18.

Any sign of weakness in the labor market could revive fears about a possible recession, which roiled markets in late July and early August. The influence of the Japanese yen carry trade exacerbated the sell-off.

Ahead of Friday’s report, there are other updates on the health of the labor market, starting with Wednesday’s JOLTS job openings report, which also includes data on layoffs. Thursday will bring ADP data on private sector hiring, along with the weekly report on initial jobless claims.

Market Volatility

Wall Street stocks rallied, and the Dow posted its second straight all-time high on Friday on hopes of an imminent interest rate cut by the Federal Reserve.

Markets have rebounded since the massive sell-off in early August, and signs that the rally is broadening are seen as a positive sign for investors uneasy about the concentration in tech stocks.

Investors are also investing in smaller value and small-cap stocks, which are expected to benefit from lower interest rates.

However, according to analysts at Bank of America (BAC), September and October are historically volatile months for stocks, and surprises in economic data could cause further market convulsions.

Bank of Canada to Cut Again

The Bank of Canada is expected to deliver its third straight rate cut when it meets on Wednesday.

The bank has already cut its benchmark rate twice since June to 4.5%, and markets currently expect two more rate cuts this year after September.

Friday’s data indicated that the Canadian economy posted slightly better-than-expected growth in the second quarter, although, in a sign of future weakness, June growth was flat and, according to Statscan’s preliminary estimates, there will be no growth in July either.

Bank of Canada Governor Tiff Macklem hinted after the bank’s July meeting at a shift in focus from fighting inflation to stimulating the economy.

Oil Prices Under Pressure

Oil prices closed the week lower on Friday and added to heavy monthly losses as forecasts for an increase in OPEC+ supply from October weighed on the market.

Brent crude oil futures for October delivery, which expired on Friday, settled USD 1.14 lower at USD 78.80 per barrel, down 0.3% for the week and 2.4% for the month.

U.S. West Texas Intermediate crude oil futures fell USD 2.36 to USD 73.55, down 1.7% for the week and 3.6% for August.

Reuters reported on Friday that OPEC+ is still planning to increase production starting next month, as outages in Libya and cuts announced by some members to offset surplus production mitigate the impact of weak demand.

Uncertainty surrounding the Fed’s expected rate cuts also weighed, as strong consumer spending data on Friday argued against accelerating the pace of easing. Lower rates could stimulate economic growth and oil demand.