With Jackson Hole in the rear-view mirror, August’s employment report could be the next driver for markets.

Stocks gained in the past week, surging again to new highs Friday after a speech by Federal Reserve Chairman Jerome Powell. The chairman acknowledged that Fed officials expect to taper back their $120 billion a month bond-buying program this year, a first step toward reversing easy policy.

Powell was speaking at the Kansas City Fed’s annual Jackson Hole, Wyo. symposium, held virtually this year. He said the Fed has seen sufficient progress on inflation, but the labor market has not yet improved enough to start the taper. Importantly, he also emphasized that the wind down of the bond program does not mean the Fed will automatically move on to raise interest rate hikes.

“Powell has made it clear the Fed is not prepared to raise interest rates anytime soon. The market seems relieved by that. … With some of the economic data already slowing, I think interest rate hikes are far, far away, and investors are happy about that,” said Michael Arone, chief investment strategist for the US SPDR business at State Street Global Advisors.

Arone said the Fed has so far avoided a “taper tantrum,” similar to the 2013 market sell-off when the Fed announced it was rolling back quantitative easing. Powell’s speech was widely anticipated to clarify the Fed’s position on its $120 billion monthly bond purchases, after a number of Fed officials called for the start of a wind down.

Jobs are the focal point
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Now, market focus shifts even more fiercely to jobs data, with the release Friday of the August employment report.

“For sure, the market is going to react,” said Jim Caron, head of macro strategies for global fixed income at Morgan Stanley Investment Management. “I think it’s important. I think the issue that they’re going to have is unemployment benefits don’t really run out until the beginning of September. It’s really not until you get the October jobs number that you get a more free look at September.”

The dollar index sank after Powell’s Friday morning speech, as stocks rallied to new highs and Treasury yields fell. Other data in the coming week includes consumer confidence Tuesday and Wednesday’s release of Institute for Supply Management manufacturing data and ADP’s private sector payroll data, a kind of preview for Friday’s government jobs report.

“I wouldn’t be surprised to see follow-through Monday and Tuesday, but ahead of ADP on Wednesday, I’d look for position adjusting which means weaker stocks and weaker bonds and stronger dollar ahead of the jobs data,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.

He said Powell was dovish, as expected, while still emphasizing that tapering was coming. But the key for markets was that he stressed the end of the program does not mean “tightening” or rate hikes. The 10-year Treasury yield had risen above 1.35% this week, but fell to 1.31% after Powell spoke Friday.

U.S. 10-year Treasury yield

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“The market will get cautious again ahead of the jobs data. Then it’s a new world into September. You have to wait until after the jobs data to see if these moves have sustaining power. This is ‘a buy the rumor, sell the fact’ move,” Chandler said.

Some market pros had expected an announcement on tapering from the Fed at its September meeting, but that view has now mostly changed to a November or December announcement. “Because of the uncertainty of delta, I think it will take more than the next jobs report,” said Diane Swonk, chief economist at Grant Thornton. “The disruption to jobs in particular is if schools have to close again.”

Economists polled by Dow Jones expect 750,000 jobs were created in August and the unemployment rate fell to 5.2%. In July, the economy created 943,000 jobs and unemployment slid to 5.4%. Education was a big contributor in July, with 261,000 jobs added in public schools and private education.

“It doesn’t have to be a spectacular number to satisfy their needs,” said Swonk of the August report. “You need a solid jobs number, something north of a half million… I think we’re going to be close to that. They’re going to want to see September employment as well.”