With the recent Personal Consumption Expenditures Price Index (PCE) in the rear-view mirror, the next big test for stocks’ all-time highs and fixed income ETFs is Friday’s jobs report.

Earlier this month, the Federal Reserve's preferred inflation measure indicated that price increases are easing towards the Fed's 2% target. That’s shifting more attention to the central bank's other key goal: maintaining maximum employment.

Speaking at the National Association for Business Economics annual meeting Monday, Fed Chair Jerome Powell noted that the labor market remains in "solid shape" and pointed out that the Fed is reducing interest rates partially to sustain that strength. However, signs the labor market is slowing have emerged.

Unemployment has steadily risen throughout 2024, and it now stands at 4.2%, its highest point in nearly three years. Job creation has also weakened, with two of the smallest monthly job gains recorded this year, and job openings in July hit their lowest since January 2021.

As this week’s key jobs report approaches, the primary concern is the pace at which the labor market slows.

The monthly U.S. nonfarm payrolls report jobs report will be released by the Bureau of Labor Statistics (BLS) at 8:30 a.m. Eastern Time Friday.

Why Investors Will Be Watching Friday’s Jobs Report

Investors will closely watch Friday's U.S. nonfarm payrolls report because it provides crucial insights into the labor market, which directly influences Federal Reserve policy. The report includes data on job creation, the unemployment rate, and wage growth, which are key indicators of economic health.

If the labor market shows stronger-than-expected growth, that may cast doubt on the size and frequency of coming rate cuts, as the Fed aims to prevent the economy from overheating. Conversely, weaker-than-expected job numbers may prompt the Fed to consider further or deeper cuts, potentially boosting markets, especially bond prices.

In addition, wage growth data is significant because higher wages can fuel inflation by increasing consumer spending, causing additional concern that inflation may remain sticker than expected.

Jobs Report Outlook for Stock and Fixed Income ETFs

The stock and bond markets may react differently to Friday’s jobs report based on whether the unemployment rate comes in higher or lower than expected.

• If unemployment comes in higher than expected: This would signal a weakening labor market, potentially indicating an economic slowdown. For stocks, especially cyclical or growth-oriented sector ETFs like the Consumer Discretionary Select Sector SPDR Fund ETF (XLY) and the Invesco QQQ Trust ETF (QQQ), respectively, this could trigger a negative reaction as concerns about reduced consumer spending and economic activity grow. However, rate-sensitive ETFs like the iShares 20+ Year Treasury Bond ETF (TLT) may react positively since a softer labor market could lead the Federal Reserve to pause or cut interest rates sooner, lowering yields and boosting bond prices.

• If unemployment comes in lower than expected: A stronger-than-expected labor market suggests robust economic growth, which would bolster investor confidence in equities, especially in sectors like consumer discretionary and industrials. However, bond prices might fall as investors anticipate that the Fed could maintain or raise rates to manage inflation, driving yields higher.