Investors are awaiting a report on Friday showing a slowdown in the pace of hiring in June, based on weak services and manufacturing data, and reaffirming their expectations for interest rate cuts starting in September.
Signs of lower rates in the near future, which would make it cheaper for consumers and businesses to borrow, have generally been accompanied by market recoveries.
Stock indexes that track the largest companies have been on the rise in recent weeks. The S&P 500 has repeatedly broken records and is up more than 16 percent this year. However, the Russell 2000 index, which tracks smaller companies that are more sensitive to the ebb and flow of the economy, has largely stagnated, with weaker economic data this week sending the index down 0.5 percent ahead of the Independence Day holiday.
Economists expect the June jobs report to show a healthy labor market, albeit with slower job creation and wage growth moderating. Earlier this week, widely watched surveys of manufacturing and services activity came in lower than expected.
Coupled with signs of cooling inflation, a slowdown in economic growth would give the Federal Reserve justification for cutting rates, which have remained high for months.
Federal Reserve Chairman Jerome H. Powell said at a conference this week that if economic data continued to come in as they have been, the Fed might consider cutting interest rates.
“We have made good progress in bringing inflation down to our goal, while the labor market has remained strong and growth has continued,” Powell said. “We want to see that process continue.”
Powell did not specify when the Fed will begin cutting rates, but investors are anticipating it will do so in September, with roughly two quarter-point cuts expected for the year. Those bets have risen since the start of the week, when a September cut was seen as more of a 50/50 proposition.
The data was “somewhat weaker than expected,” Deutsche Bank analysts said, “reinforcing the fact that the economy is losing momentum as we approach the second half of the year.”
