A look at the day ahead in U.S. and global markets from Mike

Dolan

U.S. stocks look to have weathered the early September squall

for now but interest rate speculation and ebbing bond yields now

take center stage as evidence mounts of slowing U.S. labor

market.

Futures markets now see almost a 50-50 chance of a 50 basis

point Federal Reserve rate cut this month and two-year Treasury

yields plumbed 3.75% on Thursday for the first time

in 16 months.

In a sign that the Treasury market suspects the Fed may be

late in getting across the weakening employment picture, the gap

between two-year yields and the Fed policy rate is at its widest

since 1981.

And after more than two years of an inverted 2-to-10 year

Treasury yield curve, the gap has been closed to zero. And

although traditional market signals about this peculiar economic

cycle have misfired repeatedly, that yield curve measure has

historically turned positive just before the onset of recession.

As a week of big labor market readouts unfold, the reasons

for heightened easing speculation are clear.

Following another dour update on contracting manufacturing

activity on Tuesday, Wednesday's data showed U.S. job openings

dropped to a 3-1/2-year low in July.

Even though those numbers are for the month before this

week's critical August employment report, the Fed's latest

'Beige Book' economic update described the jobs market as

"generally flat to up slightly in recent weeks", and the stakes

are rising.

The ratio of job openings to job seekers is basically back

to pre-pandemic levels.

Private sector jobs data and updates on layoffs for August

as well as weekly jobless claims numbers are all due later on

Thursday.

That the Fed is now watching these as a priority is not in

doubt and San Francisco Fed President Mary Daly told Reuters

late on Wednesday that the Fed needs to cut to keep the labor

market healthy.

"As inflation falls, we've got a real rate of interest

that's rising into a slowing economy; that's a basic recipe for

over-tightening," Daly said in an interview.

Atlanta Fed boss Raphael Bostic said he was now giving equal

attention to the Fed's maximum employment mandate as he is to

inflation. "We must not maintain a restrictive policy stance for

too long," he said.

All of which may reasonably unnerve the stock market, but

the Atlanta Fed's own real time 'GDPNow' growth model shows the

economy still growing at more than 2% during the current

quarter. Service sector surveys for August are due later on

Thursday and are likely to give a better picture of activity

than the factory readings earlier in the week.

Spurring easing speculation and the bond market rally, oil

prices continue to struggle and U.S. crude prices remain

below $70 per barrel - clocking year-on-year declines of almost

20% for the first time in a year.

The Bank of Canada felt emboldened enough to cut its policy

rates on Wednesday for the third time this year, as expected.

But Governor Tiff Macklem, citing weak growth, said a larger cut

could be in order if the economy needs a boost.

And so awaiting the rest of week's big reports, Wall Street

stock indexes steadied on Wednesday after the

early week selloff - with futures marginally in the red

before today's bell and global stocks slightly lower too.

The VIX volatility gauge has settled back around 20 -

just above historical averages.

The dollar index was also lower, with the

getting a slight lift from upbeat German industry orders data

for July that lifted the manufacturing gloom somewhat.

Keeping the euro zone picture in context, however, Germany's

Ifo institute said the economy there is likely to stagnate this

year, abandoning its previous forecast of 0.4% growth.

Key developments that should provide more direction to U.S.

markets later on Thursday:

* US August private sector payrolls from ADP, weekly jobless

claims, Aug layoffs, Aug service sector surveys from ISM and S&P

Global, Q2 revisions of productivity and unit labor costs

* US corporate earnings: Broadcom, DocuSign, Smith & Wessson,

American Outdoor Brands, etc

* US Treasury sells $85 billion of 4-week bills

(By Mike Dolan, editing by Ros Russell

[email protected])