By Lewis Krauskopf

NEW YORK (Reuters) – A U.S. labor market report due late next week will provide critical insights into the economy’s health, gauging investors’ confidence in upcoming interest rate cuts that have buoyed U.S. equities to record levels.

Last month’s surprisingly weak U.S. payrolls data increased the expectation that the Federal Reserve will cut rates in its next meeting in September, as the central bank seeks to bolster the labor market amidst inflation concerns.

A disappointing August employment report next Friday could spark worries about a slowing economy but might also prompt the market to anticipate more aggressive rate cuts, according to Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions.

> “Lower rates probably trump a modestly slowing labor market, and that probably puts a floor underneath the economy and … the stock market,” said Janasiewicz.

U.S. equities have risen sharply since hitting their low point in April this year. Investors have largely dismissed fears that U.S. President Donald Trump’s tariffs would lead to a recession, with many tech and other stocks gaining from the optimism surrounding artificial intelligence’s business potential.

Recently, stock indexes fell, exacerbated by declines in AI-related stocks, and with earnings reports from major chipmaker Broadcom anticipated on Thursday. However, the benchmark S&P 500 ended the typically tough month of August up 1.9%, giving it a year-to-date gain of about 10%, close to record-high levels.

Markets remain in a historically risky period. According to the Stock Trader’s Almanac, September has averaged a decline of 0.8% over the last 35 years, marking it as the worst-performing month for the S&P 500, with the index falling in 18 of those years.

The jobs report will be the first major economic release for September. A Reuters poll anticipates that employment in August will have increased by 75,000 jobs, following a July report that showed a surprising growth of only 73,000 jobs, with significant downward revisions to the previous two months.

Alex Grassino, global chief economist and head of macro strategy at Manulife Investment Management, expects that components of the jobs report, such as the unemployment rate and hourly earnings, will indicate a cooling labor market.

The weak July report heightened market expectations for a Fed rate cut in September, expectations that were reinforced after Fed Chair Jerome Powell noted rising job market risks.

As of Friday, Fed funds futures indicated an 89% chance that the central bank will reduce rates by 25 basis points at its September 16-17 meeting.

> “It would take very broad-based strength in the report in order for the Fed to rethink the idea of moving rates lower,” said Drew Matus, chief market strategist at MetLife Investment Management, adding that the chances of such a report are “pretty low.”

Matus commented that even a fair report wouldn’t deter the Fed from cutting rates. While a September rate cut seems likely, job data could influence expectations regarding the extent of future reductions. Fed futures suggest around 55 basis points, or just over two standard cuts, expected by December.

Other key Fed developments will be watched closely in the upcoming week, especially after Trump attempted to dismiss Fed Governor Lisa Cook, as he aims to reshape the central bank’s board. Cook has filed a lawsuit claiming Trump lacks the authority to remove her from office, reigniting concerns about the Fed’s credibility and its independence from political pressure amidst Trump’s ongoing criticisms of the Fed and Powell for not lowering rates sufficiently.

Grassino commented that the current controversy is increasing speculations about the Fed’s independence, but for now, such risks are presumably priced in.

> “A lot of things that traditional market participants would have taken as a given are being questioned,” he noted. “As they arise, you are widening potential tail risks.”