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])