After investors faced an onslaught of economic data to wrap up August, a lighter calendar and holiday-shortened week awaits investors as the Federal Reserve's next interest rate decision quickly approaches.
US markets will be closed on Monday in observation of Labor Day, with updates on the services sector, the Federal Reserve's latest Beige Book report, and a smattering of corporate earnings serving as highlights in the week ahead.
Stocks closed out the last week of August in rally mode after falling for much of the month.
The Nasdaq Composite (^IXIC) led gains, rising more than 3% last week while the S&P 500 (^GSPC) gained 2.5%. The Dow Jones Industrial Average (^DJI) lagged its peers, rising 1.4%.
On the economic calendar this week, Wednesday will present investors with the busiest schedule as service sector readings from S&P Global and the Institute for Supply Management are due out in the morning while the Fed's Beige Book will come out that afternoon.
On the corporate side, Kroger (KR), GameStop (GME), and Zscaler (ZS) highlight a subdued week of quarterly reports.
Last week, the crucial August jobs report offered the latest evidence the US labor market continues to slow, with the US economy creating 187,000 new jobs last month while the unemployment rate unexpectedly rose to 3.8% as more Americans sought employment.
This data capped a week that also featured a sharp drop in job openings and a downward revision to second quarter GDP growth estimates. And investors view this data run as a sign the Fed will elect not to raise rates at the conclusion of its September 19-20 policy meeting.
Data from the CME Group showed markets on Friday were pricing in a 94% chance the Fed keeps rates unchanged later this month, up from 80% the prior week. Bets on another rate hike in November also dropped as of Friday, to 34% from 47% the week prior.
"The loosening up of labor market slack in [Friday's] report, combined with the friendly JOLTS report from earlier [last] week, should cement the case for a Fed on hold later this month," JPMorgan economist Michael Feroli wrote in a note to clients on Friday.
"The more interesting question will be whether the median dot continues to project one more hike this year. Either way, Fed leadership must be happy with a week that marked up odds for achieving a soft landing."
Ryan Sweet, chief US economist at Oxford Economics, wrote in a note on Friday it was a "good week for those in the soft-landing camp."
"The August employment report gives the Fed plenty of room to leave policy steady through this year and into next," Sweet wrote.
"The trend in job growth continued to slow, the unemployment rate rose, labor force participation increased, and earnings growth decelerated, all signs that a better balance between the supply and demand for labor continues to evolve. The rebalancing of labor supply and demand is going more smoothly than we initially anticipated, keeping the prospect of a soft landing alive."
And though developments in the economy may be favorable for the Fed — and by extension, investors — those looking at the seasonal forces in play for the stock market may find fewer positives in the coming week.
After a choppy August, stocks are now entering a historically bad month. Dating back to 1945, September has historically been the year's worst month for the S&P 500 with the index falling, on average, 0.7% during September and logging gains less than half the time.
Though as Yahoo Finance's Jared Blikre highlighted last week, the rally to start 2023 might put history on the side of investors. When the S&P 500 is up more than 10% entering August, as was the case in 2023, the benchmark index typically falls 3.2% in August. This year, the index fell 1.7% in August.
But during these years, the S&P 500, on average, rises 2.3% in September and gains more than 9% from September through year-end.
"We believe consensus caution of September will prove to be unwarranted," Fundstrat's Tom Lee wrote in a note on Friday. "In fact, we believe September probabilities favor a gain of 2% to 3%, supported by a downward shift in consensus views around inflation and inflation risks."
Weekly Calendar
Monday
Markets closed for Labor Day.
Tuesday
Economic data: Factory orders, July (-2.5% expected, +2.3% previously); Durable goods orders, July (-5.2% previously)
Earnings: Zscaler (ZS), GitLab (GTLB)
Wednesday
Economic data: MBA mortgage applications (+2.3% previously); S&P Global US services PMI, August final (51 previously); S&P Global US composite PMI, August final (50.4 previously); ISM Services PMI, August (52.5 expected, 52.7 previously); Federal Reserve Beige Book
Earnings: American Eagle Outfitters (AEO), ChargePoint (CHPT), C3.ai (AI), Dave & Buster's Entertainment (PLAY), Express (EXPR), GameStop (GME)
Thursday
Economic data: Initial jobless claims (235,000 expected, 228,000 previously)
Earnings: DocuSign (DOCU), RH (RH), Zumiez (ZUMZ)
Friday
Economic data: Wholesale inventories, month-over-month July (-0.1% previously)
Earnings: Kroger (KR), Rent the Runway (RENT)
Josh Schafer is a reporter for Yahoo Finance.
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