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August US employment report due on Sept 5

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Prior weak jobs report sets stage for Fed rate cut at Sept

meeting

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Investors eye Fed independence as Trump seeks removal of

Fed

official

By Lewis Krauskopf

NEW YORK, Aug 29 (Reuters) - A U.S. labor market report

late next week will give a crucial read into the economy's

health and test investors' confidence that interest rate cuts

are coming soon, a view that has helped lift U.S. equities to

record-high levels.

Last month's release of surprisingly weak U.S. payrolls data

raised expectations that the Federal Reserve will start cutting

rates again at its next meeting in September, as the central

bank moves to support the labor market despite inflation

worries.

A soft August employment report next Friday could raise

concerns about a slowing economy, but it also might lead the

market to price in more aggressive cuts, said Jack Janasiewicz,

lead portfolio strategist at Natixis Investment Managers

Solutions.

"Lower rates probably trump a modestly slowing labor market,

and that probably puts a floor underneath the economy and ...

the stock market."

U.S. equities have charged higher since hitting their lows

for the year in April. Investors have shaken off concerns that

U.S. President Donald Trump's tariffs would send the economy

into a recession, while a wide swath of tech and other stocks

have benefited from optimism about the business potential of

artificial intelligence.

Despite a modestly disappointing earnings report this week

from market heavyweight and AI bellwether Nvidia ( NVDA ), the

benchmark S&P 500 ended on Thursday at record highs. The

index was on track to finish the traditionally challenging month

of August up over 2%, pushing its year-to-date gain up to more

than 10%.

Still, markets remain in a historically treacherous patch on

the calendar. Over the past 35 years, September has ranked as

the worst-performing month of the year for the S&P 500, with an

average decline of 0.8% during that period, according to the

Stock Trader's Almanac. The index has fallen 18 of 35 times in

September, the only month to have been down more than up in that

period, according to the Almanac.

The jobs report is September's first major economic release.

Employment in August is expected to have climbed by 78,000 jobs,

according to a Reuters poll. In the prior month's report,

nonfarm payrolls grew by 73,000, a surprisingly weak number

compounded by sharp downward revisions to growth in the prior

two months.

Alex Grassino, global chief economist and head of macro

strategy at Manulife Investment Management, said he expects

components of the jobs report, such as the unemployment rate and

hourly earnings, "to point to basically the same message, which

is the U.S. labor market has cooled."

The weak July report raised market expectations that the Fed

would cut rates at its next meeting in September, bets that

firmed after Fed Chair Jerome Powell recently said job market

risks were rising.

Fed funds futures as of Thursday suggested an 89% chance the

central bank will reduce rates by 25 basis points at its

September 16-17 meeting, LSEG data showed.

"It would take very broad-based strength in the report in

order to get the Fed to rethink the idea of moving rates lower,"

Drew Matus, chief market strategist at MetLife Investment

Management said, adding the odds such a report are "pretty low."

"We could see an OK report, and an OK report isn't going to

dissuade the Fed from cutting," Matus said.

While a September cut may be close to locked in, the jobs

data also could sway expectations about the amount of easing in

the months ahead. Fed funds futures suggest about 55 basis

points, or just over two standard cuts, are expected by

December.

Other developments at the Fed will also be in focus for the

market in the coming week, after Trump moved to fire Fed

Governor Lisa Cook as he seeks to reshape the central bank's

board. Cook filed a lawsuit on Thursday, claiming Trump has no

power to remove her from office.

The controversy has reignited concerns over the Fed's

credibility and its ability to conduct monetary policy free of

political pressure, after Trump for months railed against the

Fed and Powell specifically for not lowering rates to the extent

he wants.

While the situation has ramped up speculation in capital

markets around Fed independence, those risks are probably

appropriately priced in, for now, Grassino said.

"A lot of things that traditional market participants

would have taken as a given are being questioned," he said. "So

as they are coming up, you are widening out the tail risks that

you could potentially see."