Fed's Dovish Signals Ignite Market Firestorm Amid Weak Jobs Data and Rate-Cut Speculation

The Federal Reserve’s dovish outlook is increasingly dominating global capital markets.


The recent downturn in the U.S. labor market added more weight to the narrative. The July Nonfarm Payrolls reported by the U.S. Department of Labor showed a meager increase of 114,000 jobs, falling short of the expected 175,000. Additionally, the unemployment rate rose by 0.2 percentage points to 4.3%, marking a high not seen since October 2021. The year-on-year growth rate of hourly wages declined by 0.2 percentage points to 3.6%, with month-on-month growth decreasing by 0.1 percentage points.


This weak employment report heightened investor concerns about further economic slowdown, strengthening the anticipation of a Fed rate cut and triggering several market reactions. Gold futures surged to new highs, U.S. Treasury yields plummeted, and global stock indices saw widespread corrections.


Institutions commonly project that the Federal Reserve will begin easing rates in September. Currently, the Federal Funds Rate target range stands at 5.25% to 5.5%, the highest level in 23 years. Since the onset of the current rate hike cycle in March 2022, the rate has surged from near-zero levels to current values at an unprecedented speed in over four decades.


In the lead-up to the Fed’s September monetary policy meeting, the release of data such as July CPI, August Nonfarm Payrolls, and August CPI will further confirm the timing and pace for the expected Fed rate cuts.


Market sentiment suggests that a Fed rate cut could signal a “recession,” which has led to increased focus on whether the risk of a U.S. economic downturn will escalate.


As this expectation permeates, market volatility has increased as capital takes preemptive actions. Current asset trends are now more closely aligned with the anticipated economic trajectory.


Noteworthy movements were observed in long-term U.S. Treasury futures, which saw significant gains. On August 2, long-term U.S. Treasury futures surged over 2%, with 10-year Treasury futures gaining 1.25%.


On the stock market, indices were weighed down, with the Dow Jones falling by 2.1%, the Nasdaq composite by 3.35%, and the S&P 500 by 2.06% for the week ending August 2 — marking three consecutive weeks of decline.


Meanwhile, precious metals have rallied, with COMEX gold futures increasing by 4.41% for the week, hitting new historic highs.


The shifting asset allocation logic among investment institutions underscores a clearer trend towards positioning for a Fed rate cut, moving from hesitant and repeated actions to more decisive executions.


The Federal Reserve’s potential move towards an easing cycle is bolstering the forecast for a more accommodating monetary environment, which continues to surface in market sentiment.


Looking forward, the assets’ performance will largely hinge on whether the U.S. economy veers towards a recession.