US economy produced 114,000 jobs in July, much less than expected
The US economy added 114,000 jobs in July, well below expectations in a sign that will raise questions for the Federal Reserve.
Economists had expected 175,000 new jobs, down from 206,000 in June, according to a poll of economists by Reuters.
Key events
Financial markets are now pricing in a much higher chance of more interest rate cuts by the US Federal Reserve this year.
There is an 88% chance of the Fed’s federal funds rate target range dropping a whole percentage point from its current range of between 5% and 5.25%, according to CME’s FedWatch tool, which is based on derivatives trades.
Markets not messing about!
CME Fedwatch now pointing towards a 43% chance that we will see rates slashed by 125bp by year-end (three meetings).
Base case is for 100bp worth of cuts (88% chance)
The decline in average hourly earnings really helped reiterate the potential for a… pic.twitter.com/Jq03aqvXO1
— Joshua Mahony (@JoshuaMahony) August 2, 2024
The Federal Reserve will surely have to act to stimulate the US economy given the signs of weakening, say economists.
Stephen Brown, deputy chief North America economist at Capital Economics, a consultancy, said:
The sharp slowdown in payrolls in July and sharper rise in the unemployment rate makes a September interest rate cut inevitable and will increase speculation that the Fed will kick off its loosening cycle with a 50 bp cut or even an intra-meeting move.
The 114,000 gain in non-farm payrolls was much weaker than the consensus estimate of 175,000 and, based on the initial market reaction, weaker than what investors were braced for even after the downbeat initial claims and ISM releases yesterday. The slowdown was broad-based across the service sectors.
Neil Birrell, chief investment officer at Premier Miton Investors, said:
US employment data couldn’t have been released at a more sensitive time; markets are wobbling, concerns over Fed policy abound and corporate earnings are in the spotlight. The weak data will cause more angst, and concerns over the health of the economy will increase. We have pivoted from looking at a robust economy to a weakening one and while markets will reflect this, they will also price in the fact that the Fed still has plenty of scope to act.
Here is more on the rush for bonds: prices of US Treasuries have jumped, pushing down yields markedly.
Reuters reports:
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US 10-year yields dropped as low as 3.79%, the lowest since December, and were last down 15.9 bps at 3.818%.
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U.S. two-year yields fell below 4% for the first time since May 2023. They were last at 3.945%, down 21.7 bps.
You can see how immediate the move was in this chart from Bloomberg News:
The bond markets go wild. 2yr now below 3.9% — falling a stunning 27 basis points after the jobs report comes in much softer than expected. pic.twitter.com/PtX6tuTq3L
— Sonali Basak (@sonalibasak) August 2, 2024
A former deputy director of the US National Economic Council says it is “not time to panic”.
Bharat Ramamurti said on X:
It’s not time to panic — there are still many underlying signs of strength in the economy and unemployment remains low by historical standards — but the Fed failing to cut rates in July was a mistake and it needs to rectify that mistake in September with a cut of 50 bps or more.
It’s not time to panic — there are still many underlying signs of strength in the economy and unemployment remains low by historical standards — but the Fed failing to cut rates in July was a mistake and it needs to rectify that mistake in September with a cut of 50 bps or more. https://t.co/s58FKO3B72
— Bharat Ramamurti (@BharatRamamurti) August 2, 2024
Nasdaq 100 futures are now down 2.5%, while those for the S&P 500 are down 1.6% – it looks like a painful day ahead for Wall Street.
The US jobs data has triggered some financial market volatility.
The US dollar has slid. The dollar is down 0.7% against a trade-weighted basket of other currencies.
Investors are piling even more into bonds. The yield on the two-year UK gilt fell to its lowest since April 2023, in a sign that demand for government debt has increased.
And European stock markets have continued their slide: the FTSE 100 is down 0.5%, but France’s Cac 40 has hit its lowest since November 2023.
European bank stocks have slumped, and are down 2.8% as investors brace for interest rate cuts from the Federal Reserve.
Bad U.S. jobs numbers – affirms economic slowdown, will fuel recession talk and need for bolder rate cuts.
Unemployment rate up to 4.3%, higher than expected
Payrolls +114k in July, less than expected
June payrolls revised down
Wage growth slows more than expected
— Jamie McGeever (@ReutersJamie) August 2, 2024
US unemployment rises to 4.3% in July, highest since 2021
Another crucial data point from the US jobs numbers: unemployment rose to 4.3%, the highest since October 2021 during the coronavirus pandemic turmoil.
Economists had expected the unemployment rate to stay at 4.1%, but the data, from the Bureau of Labor Statistics, paint a picture of a worsening economy.
US economy produced 114,000 jobs in July, much less than expected
The US economy added 114,000 jobs in July, well below expectations in a sign that will raise questions for the Federal Reserve.
Economists had expected 175,000 new jobs, down from 206,000 in June, according to a poll of economists by Reuters.
Bank of England chief economist warns against ‘persistent’ UK inflation
Bank of England chief economist Huw Pill has said the battle against inflation is not over as he laid out the case against further interest rate cuts.
Pill was one of the four economists on the nine-member monetary policy committee who voted against cutting interest rates yesterday. The split demonstrates just how tight the decision was for the Bank.
He does not want the Bank to push ahead just yet with further loosening, because he thinks that inflation may remain above the 2% target, according to a presentation to news agencies on Friday. He said, via Reuters:
I think we can’t be complacent, we can’t declare ‘job done’ because there are some sort of dynamics in the UK economy, a sort of persistent component, that we need to be cautious about.
I think we shouldn’t be yet promising that rates are going to move down further in the very short term.
With 15 minutes to go until the non-farm payrolls data, stock market futures suggest the Nasdaq is due to fall 1.7%.
The broader S&P 500 index is due to fall 1.1%, while the Dow Jones industrial average is due for a 0.8% decline.
There is little doubt from economists and strategists that the US economy is slowing. The question is how far the Federal Reserve will go to cut interest rates and prop up growth.
Kit Juckes, a strategist at Société Générale, a French investment bank, said:
To be over-simplistic, the US manufacturing sector has been losing momentum and employment growth has been slowing for months. The question is whether we are near a tipping point where the pace of slowdown picks up enough to make the Fed wish it had started to cut rates sooner than it has.
Ernie Tedeschi, director of economics at The Budget Lab at Yale university, said, via Reuters:
The labour market is in a good place, but there have been clear signs that momentum has also been slowing.
It is slowing in a manner that is consistent with a labour market that is reaching a ceiling, not deteriorating.
So what should we expect from the US jobs data?
The key figure is the number of jobs added to non-farm payrolls. (It strips out farm workers because their employment is highly seasonal.) Economists polled by Reuters expect the US economy added 175,000 jobs in July, down from 206,000, but still a level that would indicate a relatively healthy economy.
Wage data is published at the same time. The increase in annual wages in June at 3.9% was the smallest in more than three years, suggesting inflationary pressures might be easing. Economists expect that to drop to 3.7%.
Anything much lower than the consensus prediction would be likely to deepen the stock sell-off, with investors concerned about whether the US Federal Reserve has done enough to pull off a “soft landing” and avoid a recession as the economy slows.
The Federal Reserve held interest rates steady on Wednesday but signalled that it may loosen monetary policy in the future.
A September interest rate cut is a near certainty, according to Matthew Ryan, head of market strategy at Ebury, a financial services firm. He said:
The main question now surrounds the pace of easing beyond the September meeting.
Market participants have viewed Powell’s remarks as an indication that the Fed could cut rates at every meeting during the remainder of the year. Our base case remains for just two cuts in September and December, although the heavy emphasis placed by the Fed on the labour market suggests that this is not guaranteed.
Today’s NFP report will take on added importance, with economists eyeing a modest easing in both net job creation and annual wage growth.
Investors dump shares and buy bonds ahead of US jobs data
The global stock market sell-off has deepened across many of Europe’s most prominent indices, with investors nervously awaiting US jobs numbers that will be closely watched for further signs of a weakening American economy.
Germany’s Dax benchmark is down 1.5%, Italy’s FTSE MIB is down 1.7%, and France’s Cac 40 has fallen 0.6%. London’s FTSE 100 is down 0.4%.
Investors sought the safety of government bonds. The price of US 10-year Treasuries rose as demand rose, pushing the yield on the benchmark bond below 4% for the first time since February. Yields (which move inversely to prices) also fell on German and UK 10-year debt.
Pierre Veyret, technical analyst at ActivTrades, a trading platform, said:
Many investors are losing confidence after the Fed held interest rates unchanged during the latest FOMC meeting earlier this week. The latest batch of disappointing macro data, especially on the employment front, is spreading the sentiment that the Federal Reserve may be behind the curve with its monetary policy.
Volatility is likely to remain high today as investors wait for the US NFP data, hoping it will provide more clarity on the employment sector of the top economy in the world. If the US NFP and unemployment data confirm a tighter situation, this would likely support the idea that the Fed may be late with the start of its monetary easing cycle, which could fuel the current equity sell-off further.
Gold prices rally as investors look for safety
Gold prices have rallied today – a move often associated with a shift out of riskier growth assets towards safety.
The yellow metal should not be a great investment: it has limited uses beyond jewellery and some electronics, and it does not offer any future returns beyond the hope that you can sell it for more later. Yet it continues to play an important part in the balance sheets of central banks, investors and households around the world.
Gold futures prices tracked by MarketWatch reached a new record of $2,500 per troy ounce on Friday, as investors expressed concerns about the health of the US economy and sold off company shares.
Spot gold prices tracked by Refinitiv also showed gold prices up 0.8% at $2,464 per troy ounce, although that remained short of the $2,483 record mark hit a fortnight ago.
US Nasdaq set to enter ‘correction’ territory, 10% down from peak
Wall Street’s Nasdaq stock index, which traces many of the US’s tech giants, is set to fall heavily when it opens at 14:30pm BST – and it could be enough to signal a “correction”, when shares fall 10% from their peak.
Futures trades indicate that the Nasdaq will fall by as much as 1.8% at the opening bell.
Stock market corrections often follow periods of exuberance, as economic cycles turn and investors start to consider the potential for slowing output, and therefore lower profits.
A bear market is when shares fall by more than 20% – and that is often associated with recession, such as when the coronavirus pandemic lockdowns stopped activity in many sectors.
One of the biggest fallers among Europe’s large-cap stocks today is computer chip toolmaker ASM International.
ASM fell by 11% on Friday as it got caught up in the European tech stock sell-off.
The Dutch company (whose initials originally stood for Advanced Semiconductor Materials) makes equipment for depositing thin films of material on to silicon. That is a key step in the manufacture of the millions of tiny transistors that make up a computer chip.
ASM’s share price had risen to a record of nearly €750 three weeks ago as the hype around AI pushed up anything to do with computer chips. But since then its value has slumped by a quarter, as investors have questioned whether the exuberance went too far. It’s market value was €31bn (£26bn) before Friday’s slump.
However, ASM investors won’t be feeling too put out: the company’s shares are still up 19% this year, and have more than doubled since the start of 2023.
N.B., ASM International is different to the much more valuable ASML, a fellow Dutch listed company. ASML makes the lithography machines that use light to etch the transistor patterns in semiconductors. ASML is down by 8% today.
The similarity in the names comes from the fact that ASML was once a subsidiary of ASM. ASML has become much more valuable since spinning off. It was worth €332bn before today’s fall.
