Wall St Week Ahead-Jobs report, inflation data to test US rate path, economic strength

By Lewis Krauskopf

NEW YORK, Sept 25 (Reuters) - Investors will sift through reports on employment and inflation in the coming week to assess chances of a sharper trajectory of interest rate hikes, which could undermine the US stock market's rally.

Major equity indexes hovered near record levels on Thursday, with the S&P 500 .SPX just over 1% below its mid-August peak, supported by technology and AI-linked stocks.

The monthly employment report, due on October 2, will be the main event for Wall Street. A key inflation gauge will also be in focus. Investors are scanning for implications for the Federal Reserve, which began raising interest rates this month for the first time in three years to fight high inflation.

"When you step back and you look at what matters to the market right now, the Fed is front and center, interest rates are front and center," said Jim Baird, chief investment officer with Plante Moran Financial Advisors. "Both of those will be pretty important reports as indicators of how Fed thinking might evolve."

TROUBLE FROM BONDS -- AND BELOW MARKET'S SURFACE?

Equity indexes were showing resilience despite threats, mainly the continued march higher in Treasury yields, as a selloff extended with investors demanding greater compensation to hold government bonds. The 30-year Treasury yield this week reached its highest level in over 20 years and the benchmark 10-year yield rose well above the closely watched 5% threshold.

"With the action in the fixed-income market over the past several months, it’s not out of the question that things could turn south rather quickly," Matthew Maley, chief market strategist at Miller Tabak, said in a note on Thursday.

Pockets of the stock market have struggled in September, leaving investors wary of broader weakness. The S&P 500, which is more heavily influenced by stocks with the largest market capitalizations, is so far little changed in September, and remained up more than 12% in 2026.

But nine of 11 S&P 500 sectors are in negative territory so far for the month, with financials and utilities among those down over 5%. An equal-weight version of the index -- which is seen as a barometer for the average stock -- was down about 4% in September.

"The averages have held up well, but the average stock has not," said Paul Nolte, senior wealth adviser and market strategist at Murphy & Sylvest Wealth Management. "Beneath the surface, there has been some erosion."

The heavyweight tech sector has gained this month, including semiconductor shares, among the biggest winners of the AI trade. Memory chipmaker Micron Technology MU.O, whose market value has soared above $1 trillion, is due to report quarterly results on Wednesday.

PAYROLLS LOOM AS RATE-HIKE BETS FIRM

The payrolls report for September is expected to show growth of 100,000 jobs and an unemployment rate of 4.2%, according to a Reuters poll of economists.

"Expectations are that the labor market has improved in recent months," said James Ragan, co-CIO and director of investment management research at D.A. Davidson. "That positive jobs trajectory is important to give confidence that consumer spending is going to stay strong."

A blowout jobs report the prior month solidified expectations the Fed would raise rates. The central bank hiked rates by a quarter percentage point on September 16, and signaled it would raise again before the year is out. Fed Funds futures on Thursday suggested a greater than 60% chance the central bank hikes at its next meeting in October, according to LSEG data.

"The market would be pretty happy with a good but not great payrolls report," Baird said. "If payrolls were to come in exceedingly hot, that could easily elicit a short-term negative market reaction as it would be viewed as further cementing the case for another rate hike in October."

Rate hikes pose several challenges for stocks. They raise borrowing costs and slow the economy while leading to higher bond yields that create more investment competition for stocks.

Wednesday's monthly read of the personal consumption expenditures price index (PCE), closely followed by the Fed, will offer insight into inflation trends. In the prior report, the core PCE index increased 3.3% in the 12 months through July, well above the central bank's 2% target.

The report "will probably confirm that inflation is still running above target," Nolte said. But "if we can see PCE trending a little bit lower, that will give people ... a little more excitement maybe in the market."