Shock Nonfarm Payrolls Make September 50bps Cut Base Case, Flash Recession Warnings; Nasdaq Futures Tumble 3%
The latest nonfarm payrolls report for July has delivered a significant shock to the markets, with just 114,000 jobs added, far below the expected 185,000. Additionally, the unemployment rate rose to 4.3%, the highest since October 2021, exceeding the anticipated 4.1%.
Average hourly earnings also fell below estimates, increasing by only 0.2% for the month and 3.6% year-over-year, compared to forecasts of 0.3% and 3.7%, respectively.
Following the disappointing jobs data, market expectations for a Federal Reserve rate cut in September have surged. According to Fed Watch, there's now a considerable 70% probability of a 50 bps cut, with just about a 30% chance of a potential 25 basis points reduction.
Though the shocking job growth adds certainty to the likelihood of a Fed rate cut, the risk of a recession is also looming. The Nasdaq 100 futures dropped almost 2.7%, and S&P 500 futures fell 1.9% after the data was published.
In many aspects, the U.S. economy is flashing warning signs. On Thursday, the ISM Manufacturing PMI dropped to 46.8 from 48.5 in June, falling short of the market expectation of 48.8. This reading, marking an eight-month low, has triggered recession fears.
Additionally, U.S. weekly jobless claims published on the same day rose to 249,000, reaching an 11-month high. This increase could fan fears of a rapid deterioration in the labor market. The number of people receiving benefits after an initial week of aid also hit the highest level since November 2021.
Federal Reserve Chair Jerome Powell recently indicated that a rate cut could be on the table as soon as the next meeting in September. The Fed is now able to weigh prices and the labor market more equally as inflation has cooled.
"When we were far away from our inflation mandate, we had to focus on that," Powell said. "Now, we're back to a closer-to-even focus."
Regarding employment, Powell noted that indicators show the job market has gradually normalized from previously overheated conditions.