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The stock market faces a big test this week with the release of the May jobs report on Friday.
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Bank of America said the moderate range for the report is 125,000-175,000 new jobs added last month.
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The addition of fewer than 125,000 jobs suggests that bad news for the economy may end up being bad news for stocks.
The stock market faces a big test this week with the release of the May Nonfarm Payrolls report on Friday
It is estimated that 178,000 new jobs were added to the economy in May, which is in line with the April jobs report.
According to a note released Monday from Bank of America, the report needs to print within a “goldilocks range” of 125,000 to 175,000 new jobs added per month. If that happens, the stock market should rise.
This is because a reading within this range would likely give the Fed greater flexibility to cut interest rates sooner rather than later. This dynamic has been on display in recent months, as stock market investors have welcomed weaker-than-expected economic data points with the hope that an interest rate cut is imminent.
The bank also said such a reading should result in an unchanged unemployment rate of 3.9%.
On the downside, Bank of America said a May jobs report below 125,000 would be bad news for the stock market and could lead to a sell-off.
“Bad news was good news, but below +125K, bad news could become bad news,” said Osung Kwon, a strategist at Bank of America, adding that such a reading could indicate deteriorating economic growth.
“Gains of less than 125K in non-farm payrolls may increase the risk of triggering the stock rule, reviving recession fears in the market,” Kwon said.
The stock rule tracks the three-month moving average of the unemployment rate and indicates that a recession is imminent when the moving average rises by 50 basis points.
Finally, the May jobs report indicating upside for Bank of America's moderate range should also be positive for stock prices, as it will indicate stronger than expected economic growth.
Bank of America expects the May jobs report to add 200,000 jobs during the month.
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