Investors expect a report on Friday showing employment falling in June, due to weak service and manufacturing data, and expect interest rates to be cut as early as September.
Signs of lower interest rates in the near future, making it cheaper for consumers and businesses to borrow, have typically been accompanied by a rally in the market.
Stock indexes that track larger companies have rallied in recent weeks. The S&P 500 has repeatedly set new records and is up more than 16 percent this year. But the Russell 2000 index, which tracks smaller companies that are more exposed to the ebbs and flows of the economy, has largely flatlined, with weaker economic data this week pushing the index down 0.5 percent ahead of Independence Day.
Economists predict that the June jobs report will show a healthy labor market, albeit with fewer new jobs and slower wage growth. Earlier this week, widely watched surveys of manufacturing and services activity both came in lower than forecast.
Coupled with signs of declining inflation, a slowing in economic growth would give the Federal Reserve justification to cut interest rates, which have been high for months.
Fed Chairman Jerome H. Powell said at a conference this week that if economic data continues to come in at the rate of recent times, the Fed may consider cutting interest rates.
“We’ve made good progress in bringing inflation back to our objective, while the labor market has remained strong and growth has continued,” Mr. Powell said. “We want that process to continue.”
Mr. Powell did not indicate when the Fed would begin cutting rates, but investors are predicting it will take action in September, with about two quarter-point cuts expected for the year. Those bets have increased since the start of the week, when a September cut was seen as more of a 50-50 proposal.
The data was “slightly weaker than expected,” Deutsche Bank analysts noted, “and it all added to the theme that the economy is losing momentum as we enter the second half of the year.”
