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Traders Bolster Bets on Lower Fed Rates Before Jobs Report

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10/04/2019 | 09:44 am

By Amrith Ramkumar

Traders are increasing wagers that the Federal Reserve will continue to cut interest rates to stave off a recession, raising the stakes for Friday's hiring data following a volatile stretch for markets.

The S&P 500 is near a six-week low on growing fears that weakness in the manufacturing sector is spreading to other segments of the economy. Global stocks and commodities such as oil and copper tied to global growth have also slid, as have Treasury yields, with investors seeking safety from the volatility. Bond yields fall as prices rise.

Anticipation of a sharper-than-feared growth slowdown is pushing investors to bet that the Fed will continue lowering borrowing costs after rate cuts in July and September. While there are some signs that lower rates are helping the housing sector stabilize, many analysts still project weaker economic activity without a U.S.-China cease-fire on tariffs.

Shifting expectations for interest rates and trade talks have swung markets for months, including on Thursday, when stocks erased an early selloff. The recent turbulence has some anticipating more fluctuations.

Federal-funds futures, used to wager on the path of monetary policy, on Thursday showed traders pricing in a roughly 96% chance of at least one more rate cut in 2019, up from 66% on Monday, according to CME Group data.

Driving those bets: a spate of tepid growth figures around the globe. Surveys of purchasing managers in Europe and Asia released earlier in the week pointed to deepening manufacturing declines in September.

Perhaps more worrisome, Institute for Supply Management data then showed U.S. factory activity contracted for the second straight month in September and hit a 10-year low. And the ISM said Thursday that activity in the services sector slowed more than expected last month, a concern for investors who had hoped steady activity in that area and resilient consumer spending could continue to buoy stocks.

"Our data in the U.S. had been fairly insulated over the course of the last month, so these two prints were a little bit surprising," said Michael Hans, chief investment officer at Clarfeld Citizens Private Wealth. "It does seem like this is something related to the uncertainty that's plagued the economic environment."

This week's figures are adding importance to Friday's jobs data, analysts say. While hiring has softened this year, the labor market has still been relatively stable, so signs of a sharper-than-expected slowdown could reinforce growth fears.

Employers are expected to have added 145,000 jobs in September, according to economists surveyed by The Wall Street Journal. The unemployment rate is expected to stay at near a 50-year low of 3.7%, while wages are projected to rise 3.2% from a year earlier, maintaining last month's pace.

While those figures wouldn't signal an imminent recession, they would add to evidence that the trade war is denting growth. The U.S. averaged 156,000 new jobs in the three months through August, down from 190,000 in the eight years since employment started rising after the last recession.

Adding to the uncertainty buffeting markets: The Fed's projections for future interest-rate policy and economic growth last month showed differing opinions among central bankers. Fed officials have said they want to stay on a flexible path with rates based on data, but too many rate cuts could leave them without sufficient ammunition to respond if a recession does hit, analysts say.

That dilemma is increasing focus on Friday comments coming from central bankers including remarks from Chairman Jerome Powell, investors said.

"They're trying to toe the line," Mr. Hans said.

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Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

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