Wall Street will fixate on a wave of U.S. economic data next week, crested by payrolls data on Friday that could sway expectations about the timing of future interest rate hikes and spark volatility in record-high stock prices.
Fresh data about employment and consumer confidence could help investors solidify expectations for a December interest rate hike from the U.S. Federal Reserve, or lend weight to a minority of strategists predicting a rate rise as early as next month.
Fed Chair Janet Yellen said the case for a rate hike is strengthening, but she left open the timing of what would be the first increase since December 2015.
"She did put the market on notice that she'd like to raise rates, which means the payrolls data out on Friday is very important. The wage component, length of the workweek and types of jobs, all are crucial in order to extrapolate to inflation,” said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.
Following Yellen's speech, prices for fed funds futures implied investors see roughly a 60 percent chance of a December hike, up from just above 50 percent on Thursday. Investors see chances of a September hike at 36 percent, up from 21 percent.
Almost a decade of ultra-low interest rates has helped propel stock prices to record highs, even as the economy expands at a lukewarm rate and U.S. largecaps struggle with over a year of declining earnings.
Expectations for higher interest rates would likely continue a recent trend of investors selling high-dividend payers like utilities and telecoms, in favor of sectors tied to economic expansion like financials and industrials.
Underscoring the importance of the upcoming jobs report, Yellen pointed to a recent rebound in employment and said in her speech at a symposium in Jackson Hole, Wyoming that the Fed expects the economy to continue expanding.
"Chairwoman Yellen put a magnifying glass on next Friday’s jobs report. That really I do believe is going to be a determining factor of the market’s direction for its next leg," said David Schiegoleit, managing director at U.S. Bank Private Client Reserve in Los Angeles.
The August jobs report is expected to show the U.S. economy created 180,000 jobs this month after rising by 255,000 in July, according to a Reuters poll. The forecast is for the unemployment rate to dip one-tenth of a percentage point to 4.8 percent.
Other data in investors' crosshairs next week include personal consumption on Monday, consumer confidence on Tuesday, and car sales and factory activity on Thursday.
The S&P 500 fell Friday for the fifth time in six sessions, but is just 1 percent below its record high set earlier this month.
"Any potential strength in consumer and jobs data could be very helpful to support equity prices where they are right now," said Jon Adams, senior investment strategist at BMO Global Asset Management in Chicago.
(Reporting by Noel Randewich, additional reporting by Chuck Mikolajczak; editing by Rodrigo Campos and Chizu Nomiyama)