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I am not telling you anything you don’t already know when I write that the market will be watching tomorrow’s August Payrolls data closely. While I have no clue if it is going to under-perform or exceed expectations (per the graphic below), I do [think I] have a clue about the reaction to the report, whether it is positive or negative.

The estimated job additions of 161,000 does not appear to be pessimistic, by any means. It actually appears optimistic (although with our consumer culture still well intact and depending on continued strong government hiring, we cannot discount an improbably strong headline number). Here is the data schedule, including a couple of handy Fed jawbones coming after the report.

Regardless of how the report lands, here is what I am leaning toward.

1. Strong Report: Markets come under pressure again, especially in the precious metals, as fears of a stubbornly hawkish Fed regenerate. The economy is slowing, regardless of what they could rig into the payrolls report for any given month. Hence, a decline would be a buying opportunity in the precious metals complex. The same could apply to stock markets and cyclical segments. It is also possible that the stock market could rally if a “firm economy/Goldilocks” conclusion comes about as inflation is fading and they present a picture of firm employment.
2. Weak Report: Markets, especially the precious metals, could celebrate the perceived ‘done deal’ that would be a weakening Fed. This could reset markets to the upside. I would be careful about cyclical markets, however, because they are subject to an overtly weakening economy. But if “dovish Fed” cheer does hit the markets, a stock market that is on borrowed (literally) time could also resume rallying.

As to point #2, we already have a potential “to or through the election” theme for the stock market. But gold, silver and the miners could really scream in a ramp up to Fed rate cuts. However… please remember that in this scenario, with the PMs in essence aligned with cyclical markets, a strong upside reaction could be a selling opportunity, as per the plan we’ve been cobbling over the last couple of weeks. A Fed rate cut (or double cut) in September could well be a “sell the news” type event.

Okay, now let’s see what actually transpires tomorrow.