On Thursday the Australian Bureau of Statistics releases its estimate of the number of jobs created in September, as well as the unemployment and participation rates. Despite a high level of volatility in this data over the last year there is still considerable potential to move the share market.

Employment is an important factor in the growth of an economy. Tighter labour markets theoretically lead to higher wages, more spending and higher prices. This inflationary cycle is a sign of strength in an economy. However, inflation is a “Goldilocks” indicator – it should be neither too high nor too low.

 In the past most policy makers and central bankers were concerned about economies overheating, but as new RBA governor Philip Lowe pointed out this week, he is the first governor to take the reins “where the concern of the day is more that inflation might turn out to be too low rather than too high”.

The conundrum at the moment is that Australia is approaching a level where economists would argue there is full employment, yet wages growth is weak. The situation is similar in the US. Unemployment rates plummeted over the last few years, but underemployment (people looking to increase the hours they work each week) remains persistently higher. Just as 2011-12 saw a jobless recovery in many countries, this inflation-less phase of the economic pick-up brings a lot of head scratching.

That’s why this week’s job numbers are so important. A high quality pick up in jobs would lift investor confidence. The balancing factor is that a strong labour market would make interest rate cuts less likely. At the headline level, the consensus is a lift of 15,000 jobs, but an uptick in unemployment to 5.7% as participation increases. 

Analysts will look to the breakdown between full and part-time employment to assess the overall impact. Naturally, a lift in full-time work is preferred. An ideal scenario for share prices would see Thursday’s numbers drop at between 30,000 and 50,000 new jobs, with an increase in full-time work and a decrease in part-time. Counter-intuitively, an increase of more than 50,000 jobs may not support stocks, as it would likely spark disbelief and take an interest rate cut off the table.

On the other hand, a fall in jobs in September could bring selling, tempered somewhat by the increased likelihood of lower rates. A reading anywhere between 0 and 30,000 new jobs is unlikely to have a high market impact.

This news comes at a time of fine balance for shares. The Australia 200 index is poised at a potential turning point (see above). 

The 5400 level acted as resistance to market rises between later 2015 and the middle of this year. After breaking through, the former resistance becomes support. Should the market drop below 5400 there is a danger selling could accelerate. Alternatively, a bounce off support could see the index testing the 2016 high at 5610. And the job numbers may provide the catalyst that determines which of these scenarios unfolds.

Overall strategy remains unchanged. The rewards in a sideways market go to active investors and good stock pickers. While there are many potential market moving events coming, not least the US election, the employment data could set the local scene, coming ahead of the Q3 inflation read in two weeks and the RBA meeting on November 1. Investors looking to increase or reduce their holdings may do well by acting in the light of this week’s data.