U.S. Job Market Stumbles with Weak Payroll Gain, Sparking Market Turbulence and Fed Rate Cut Bets
Friday, Aug 2, 2024 9:00 am ET
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The latest U.S. non-farm payroll report released on Friday revealed an unexpectedly low increase of 114,000 jobs in July, marking the smallest gain since April 2024. This figure fell short of the anticipated 175,000 jobs, raising concerns about a cooling job market. Alongside the disappointing job growth, the unemployment rate climbed to 4.3%, higher than both the previous month's 4.1% and expectations.Average hourly earnings also showed weaker growth, with the annual rate at 3.6%, down from a revised 3.8% in the prior month, and the monthly increase at 0.2%, below the expected 0.3%. Following the release of these figures, the U.S. dollar index (DXY) fell sharply by 40 points, and spot gold prices surged by $22, reaching $2,477.58 per ounce amid heightened market anxiety.The employment report also prompted significant movements in the bond market, where the yield on the 2-year U.S. Treasury note dropped by 29 basis points to a one-year low. Short-term interest rate futures saw a substantial rise as traders increased their bets on a significant interest rate cut from the Federal Reserve, with expectations now leaning towards a 50-basis point reduction in September.The market's reaction reflects increased concerns about the economic outlook and the potential onset of a recession. Besides the drop in the dollar and the rise in gold prices, other safe-haven assets like silver also experienced gains. Concurrently, the yield curve inversion between 2-year and 10-year Treasuries narrowed to 5.7 basis points, a signal often associated with economic downturns.The weak non-farm payroll data have intensified expectations for Federal Reserve rate cuts. Futures markets now foresee a 90% likelihood of a 50-basis point cut in September. This comes amidst an already cautious market climate, following weaker ISM manufacturing numbers, which had already dampened economic prospects.Various analysts weighed in on the implications of the report. They noted that the market has become extraordinarily sensitive to any signs of economic weakness, adjusting its expectations for future Federal Reserve policies accordingly. This acute sensitivity is underscored by the rapid adjustments in Treasury yields and futures pricing.While some market observers perceive these reactions as overdone, indicating potential overreach in the market's interpretation, the data nonetheless support a narrative of increasing economic fragility, prompting heightened caution among investors. In response, equities also felt the strain, with significant declines observed across major indices. These market movements underscore the intricate interplay between labor market data, Federal Reserve policy expectations, and broader economic sentiment, all of which are intensifying the focus on forthcoming economic indicators to gauge the trajectory of U.S. economic health.