Summary: US jobs weakness prompts investors to bet on Federal Reserve rate cuts
The rise in US unemployment to a three-year high and the lower-than-expected number of new jobs have prompted investors to ramp up their bets on Federal Reserve interest rate cuts.
The shift in financial market bets on the Federal Reserve cutting interest rates is visible when comparing CME’s FedWatch tool before and after the jobs data.
Before the data, it was still showing a near certainty of rate cuts, but the chance of 0.5 percentage points (or two standard cuts) was put at 28.5%. That market-implied probability has now jumped to 58.5% after jobs numbers.
Investors have piled into safe haven bonds and dumped US stocks, fearing that a recession may be on the way, and that the Federal Reserve may be “behind the curve” in supporting the economy. The Nasdaq composite index fell into technical “correction” territory, down 10% from its recent peak.
Among investors and economists, the question is whether the Federal Reserve has made a fabled “policy mistake” by cutting interest rates too late. Bear in mind that this is a US election year: a recession and high unemployment would be bad news for Kamala Harris, running against Donald Trump for US president.
Ronald Temple, chief market strategist at Lazard, an investment bank, said:
The question is no longer whether the Fed will cut in September – it’s whether the Fed should cut more aggressively than by 25 basis points in September. Today’s job report suggests that the easing of tightness in US labor markets is threatening to turn into weakness.
The Fed was late to recognise the inflation problem. Let’s hope it doesn’t make the same mistake in the opposite direction.
Keeping rates on hold this week was indeed a mistake, said Ian Shepherdson, chief economist at Pantheon Macroeconomics, a consultancy. He said:
July’s poor employment report leaves the Fed looking woefully behind the curve with its decision to hold rates this week, and suggests that the outcome of September’s meeting now is finely balanced between 25bp and 50bp easings.
Looking ahead, we expect the trend in job growth to continue to deteriorate. [Surveyed] hiring intentions remain consistent with a further slowdown in growth in private payrolls, even though it has recovered a bit since the spring. In addition, jobless claims have picked up over recent weeks, job openings are back to pre-Covid norms, and households have become more fearful that unemployment will rise.
The real interest rate for corporate borrowing now is so high that an intense round of cost-cutting, including layoffs, likely lies ahead. Meanwhile, growth in state and local government revenues has petered out, signalling a stalling in government hiring.
In other news today from the world of business and economics:
Iberdrola, the owner of Scottish Power, has struck a deal to buy a major stake of Electricity North West which values the power grid operator at approximately £4.25bn (€5bn).
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.
Ryanair has revealed it cancelled 650 flights in July because of air traffic delays, while rival Wizz Air said the global technology outage that hit Windows computers directly disrupted about 1% of its flights.
Jet engine maker Rolls-Royce is giving each of its employees shares worth £700 after revealing bumper financial results.
You can continue to follow our live coverage from around the world:
In UK politics, police brace for more far-right riots as minister warns people about rallies in wake of Southport attack
In US politics, Kamala Harris’s campaign raises $310m, far outpacing Trump’s funding
In our coverage of the Russia-US prisoner swap, the Kremlin confirms hitman Vadim Krasikov worked for FSB security service
In our coverage of the Middle East crisis, assassinated Hamas leader Ismail Haniyeh buried in Qatar
And there is always the joy of our Olympics coverage to see you into the weekend:
Team GB wins equestrian gold, while Ireland’s double sculls have defended their title
And Morocco are beating the USA in the football quarter finals
Thanks for following the business live blog on a turbulent week. Please do join the Graeme Wearden on Monday as he returns to the hotseat. JJ
Electricity North West valued at £4.25bn in Iberdrola takeover
The owner of Scottish Power has struck a deal to buy a major stake of Electricity North West which values the power grid operator at approximately £4.25bn (€5bn).
Spanish energy giant Iberdrola has agreed to buy an 88% stake in Electricity North West (ENW), which runs the electricity network connecting 5m customers across the North West of England, for an equity value of £2.1bn.
The 60,000 kilometre power network lies between the two existing networks license areas owned by Scottish Power in central and southern Scotland and Merseyside and North Wales which it runs alongside its energy supply business and one of Britain’s largest renewable energy portfolios.
Ignacio Galán, Iberdrola’s executive chairman, said the deal underlines its strategy to invest significantly in electricity networks “which are a critical component for supporting the electrification and decarbonisation of the economy”.
The network was reportedly put up for sale by its owners, Japan’s Kepco and investment fund Equitix, last autumn in a sale which attracted interest from French energy group Engie, Canadian investor CDPQ and a consortium including private equity firm KKR with Dutch pension fund APG.
The deal has emerged almost one week after Australian infrastructure investor Macquarie agreed to take full control of Britain’s core gas transmission network in a roughly £700m deal.
Macquarie was already the network’s majority owner but agreed to buy the final fifth of the gas network from National Grid despite the UK’s ongoing efforts to shift away from fossil fuels in the future.
Nasdaq stock index in correction - down 10% from peak
The Nasdaq stock index has firmly entered correction territory – down 10% from its peak, after the surprisingly soft US jobs report and poor earnings from some of its key tech industry members, including Amazon.
Here are the opening snaps, via Reuters.
S&P 500 DOWN 78.33 POINTS, OR 1.44%, AT 5,368.35
NASDAQ DOWN 409.23 POINTS, OR 2.38%, AT 16,784.91
DOW JONES DOWN 346.01 POINTS, OR 0.86%, AT 40,001.96
The aforementioned Ernie Tedeschi, director of economics at The Budget Lab at Yale university, thinks the US jobs numbers are not quite as bad as all that.
He makes the important point that the jobs numbers move around a fair bit as they are revised and refined over the following months. The average of the last three months is above 170,000 new jobs added, which doesn’t scream “recession” when put in historical context.
This is a treading water jobs report at 114K, which is almost exactly the number of jobs we mechanically need to add to keep up with the labor force.
— Ernie Tedeschi (@ernietedeschi) August 2, 2024
But it's probably weaker than that since there will likely be future downward benchmark revisions. /1
First the good news. We should never focus on a single month. The 3MMA is +170K/month, which is solid and nonrecesssionary. And an unemployment rate at 4.3% is consistent with estimates of medium-and-long-run trend. An economy that landed here would be fine. /2
— Ernie Tedeschi (@ernietedeschi) August 2, 2024
Then again, that does not mean that the Federal Reserve is in a comfortable place.
But now the bad news. It's not clear the economy is going to settle in here. The evidence of whether monetary policy was behind the curve on labor was debatable before (I thought the Fed should have cut last week). Now it's a lot clearer. /3
— Ernie Tedeschi (@ernietedeschi) August 2, 2024
A side note on the US jobs data: the recent hurricane did not affect the figures noticeably – despite some concerns that it might do.
The US Bureau of Labor Statistics said:
Hurricane Beryl had no discernible effect on the national employment and unemployment data for July, and the response rates for the two surveys were within normal ranges.
The US dollar was already weakening this morning as earnings and earlier manufacturing data gave a hint that the economy was slowing. But it dropped markedly on the half hour as the jobs data missed economists’ expectations.
You can see the drop in the below chart showing today’s trading session (in the New York time zone):
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!
— Joshua Mahony (@JoshuaMahony) August 2, 2024
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
Economist: Fed could be forced into intra-meeting move
The Federal Reserve will surely have to act to stimulate the US economy given the signs of weakening, say economists.
The Fed’s next interest rate committee meeting is in mid-September, but it could potentially hold an unscheduled meeting – effectively an emergency one.
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.
Updated
Here is more on the rush for bonds: prices of US Treasuries have jumped, pushing down yields markedly.
Reuters reports:
US 10-year yields dropped as low as 3.79%, the lowest since December, and were last down 15.9 bps at 3.818%.
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
Updated
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 down 2.5% pic.twitter.com/UlhbFoHnWM
— Joe Weisenthal (@TheStalwart) 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.
— Jamie McGeever (@ReutersJamie) August 2, 2024
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
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.
Ryanair cancelled 650 flights in July because of air traffic control
Ryanair has revealed it cancelled some 650 flights in July because of air traffic delays, while rival Wizz Air said the global technology outage that hit Windows computers directly disrupted about 1% of its flights, Press Association reports.
The two airlines reported the impact of disruption as they unveiled how many passengers they flew last month.
Low-cost airline Ryanair said it flew 20.2m passengers in July, an 8% jump on the 18.7m people on its flights the same time last year.
Chief executive Michael O’Leary recently said the group “suffered a serious deterioration in European air traffic control capacity which caused multiple flight delays”.
O’Leary called for reform of air traffic control which he described as “hopelessly inefficient”.
Apple managed to buck the trend of weak tech earnings last night. It is once more the biggest listed company in the world by market value after the sell-off in Nvidia in recent weeks.
Like Nvidia, the iPhone maker is seen as a possible beneficiary from the artificial intelligence hype cycle. The company hopes its introduction of AI features will drive customers to buy its latest phones – after a period in which features have stagnated somewhat.
The Guardian’s tech reporter, Kari Paul, last night reported:
Apple reported better-than-expected earnings in the third quarter of 2024, with buzz about its new AI features offsetting a continuing decline in its key China market.
Earnings exceeded analyst predictions despite a year-over-year decline in iPhone sales, with revenue rising 4.9% to $85.78bn in the three months ending 29 June, beating the average analyst estimate of $84.53bn. The company maintained its cash dividend at 25 cents for each share.
The strong report represented a bright spot in the tech space after difficult earnings reports from other tech giants like Amazon, Snap and Intel. The market saw a sell-off on Thursday amid disappointing results, including from Intel – which announced plans to cut more than 15,000 jobs as it tries to cut billions of dollars in costs to turn its business around. Amazon’s stock also dropped more than 4% on Thursday after the company reported lower-than-expected sales this quarter and forward-looking statements indicating a continued slowdown in the next.
Checking in a mid-morning, and every major stock market index in Europe is down on Friday.
Germany’s Dax is down 1.1%, while Italy’s FTSE MIB is down 1.2%.
The FTSE 100 is faring somewhat better, down by only 0.3%. That is likely in part down to the Bank of England’s decision on Thursday to cut interest rates.
The mid-cap FTSE 250 index yesterday hit its highest level since February 2022 before getting caught up in the global stock rout. FTSE 250 shares are down by 1.2% today.
“August is so far off to a bad start”, said Russ Mould, investment director at AJ Bell, an investment platform.
The prospect of interest rate cuts might usually be a good thing for share prices, as the cost of borrowing falls. But before that, investors need to price in that lower interest rates reflect weaker economic activity, in the endless cycle of monetary policy.
Mould said:
An economy going through a bad patch is one catalyst for a central bank to cut rates and hopefully stimulate activity. This thought process is likely to be at the top of the agenda for the Fed this week after shocking US economic data that featured bigger than expected jobless claims and contraction in manufacturing. The narrative has changed from rate cuts equating to good news to rate cuts meaning measures to avoid recession.
Investors have been on the edge of their seats in recent weeks, taking profits in some of the previously strongest areas of the market like tech and redeploying the proceeds into value stocks that offer slower growth but at a much cheaper price.
Rolls-Royce to give each worker £700 in shares, FT reports
Rolls-Royce shares are down 0.7% today, but it is one big spender on technology research and development that is not having a tough 2024: on the contrary, its share price hit a record high on Thursday after it published strong financial results.
Today the Financial Times reports that the company is giving each employee shares worth £700, the first time that it has gifted stock to workers.
Chief executive Tufan Erginbilgic came in at a good time, when the restart of international travel after the coronavirus pandemic meant that demand for its jet engines was recovering. But he has also improved profitability by renegotiating some contracts with customers.
And he also has his eye on new opportunities, such as re-entering the larger market for engines for single-aisle planes – Rolls-Royce only makes engines for big, twin-aisle planes at the moment – and also small modular reactors, which advocates hope can be a cheaper source of nuclear energy.
European tech firms are also struggling today – as the US tech sell-off spreads across the world.
The Stoxx Europe 600 tech index has fallen 3.3% today, to its lowest point since January.
Tech stocks were buoyed by hype around artificial intelligence that briefly made US chip designer Nvidia the most valuable listed company in the world. Yet investors are increasingly questioning whether the AI boom will translate into profits in the next few years.
Has the US Federal Reserve acted too late to stop a painful slowdown in the US economy?
The Bank of England yesterday cut interest rates for the first time since the coronavirus pandemic, as its rate-setters narrowly judged that inflation looks set to fall back to below target.
But it is the Fed that will have the biggest effect on global markets, given its control of the supply of money to the world’s biggest economy. It will be a month-and-a-half until the next Fed meeting.
Financial markets are now pricing in a 100% chance that the Fed, led by chair Jerome Powell, will cut rates in September. They have moved on to asking: by how much?
Here is CME’s FedWatch tool, which shows that markets are putting a nearly 30% chance on a rate cut of 0.5 percentage points – although the stronger chances are seen for a standard 0.25 percentage point cut.
Matt Britzman, senior equity analyst at Hargreaves Lansdown, an investment platform:
There are now concerns that the soft-landing scenario priced in for most of the year could be a pipe dream, and the Federal Reserve might have missed its chance to prevent an economic slowdown by not acting on rates earlier in the week. US jobs are out today, and further weakness here will simply exacerbate the current sell-off. Bad news is back to being simply bad news.
The biggest riser on the FTSE 100 this morning is British Airways owner International Airlines Group (IAG). It is up by 3%.
IAG scrapped a proposed takeover of Spain’s Air Europa, saying it would struggle to mollify regulators who had competition concerns. Investors were clearly not enthused.
IAG also posted stronger-than-expected profits for the second quarter, surprising analysts after rivals – particularly lower-cost carrier Ryanair – had warned of falling demand.
And speaking of British Airways:
It is what is known as a “risk-off” day on global stock markets: when traders sell riskier growth-focused shares and batten down the hatches for financial market squalls.
London’s FTSE 100 index is down 0.3% in the opening trades, but it is among the better performers in Europe.
Here are the opening snaps via Reuters:
EUROPE’S STOXX 600 DOWN 0.9%
FRANCE’S CAC 40 DOWN 0.6%; SPAIN’S IBEX DOWN 1%
EURO STOXX INDEX DOWN 0.7%; EURO ZONE BLUE CHIPS DOWN 0.7%
GERMANY’S DAX DOWN 1.1%
Global stock market rout as investors consider US recession chances
Good morning, and welcome to our live, rolling coverage of business, economics and financial markets.
Stock indices around the world have slumped after weak manufacturing data and company earnings raised concerns that the US economy may be on its way to recession.
Japan’s Nikkei index fell 5.8% and the broader Japanese Topix fell 6.1%, Australia’s ASX fell 2.5%, and Hong Kong’s Hang Seng was down 2.2%. That Nikkei performance was the worst since March 2020 – the coronavirus pandemic slump.
The Nikkei 225 is getting absolutely hosed today -5%, the worst day since March 2020 and for you stats heads a 4.3 sigma move - Volumes are crazy too, 84% above the 30 day average for this time
— Chris Weston (@ChrisWeston_PS) August 2, 2024
Jump ship is the cry
It followed steep equity declines in the US yesterday, with the small-cap Russell 2000 index down 3%, and chip designer Nvidia’s slump from record heights continued.
Analysts led by Jim Reid at Deutsche Bank, highlighted weak earnings from Amazon, and said that investors appear to be betting that the Federal Reserve steps in to prop up economic growth. They wrote:
The past 24 hours have seen an increasingly precarious backdrop for risk markets, with a risk-off mood on the back of another batch of weak US data yesterday followed by mostly downbeat tech earnings overnight.
Futures are now pricing in over 175bps of Fed rate cuts over the next 12 months, which is the sort of pace that we’ve only seen in a recession in recent cycles.
Intel, the US chip manufacturer, was one of the biggest additions to the gloom – and adding to the recent sell-off among semiconductor businesses. It is a huge name, and has received vast subsidies to build new chip factories in America, but it is struggling.
Its shares are down 19% in pre-market trading after it reported unexpectedly weak earnings and a plan to cut 15% of its workforce – a number that translates to more than 17,500 jobs globally.
It is a similarly drab picture across the US manufacturing sector, according to the Institute for Supply Management’s closely followed purchasing managers’ index (PMI).
Kyle Rodda, senior financial market analyst at Capital.com, an online trading platform, said:
Stocks plunged following an ISM Manufacturing PMI survey which revealed a bigger-than-expected slowdown in factory activity in the States, raising the spectre of a steeper drop in economic growth. Historically, it’s when the ISM Manufacturing number falls below 43 that the US economy falls into recession; so, while the index is a long way from that threshold, the markets will be keeping a close eye on how it trends as the US economy moderates.
Investors today will be on tenterhooks for US jobs numbers. A weaker-than-expected non-farm payrolls number could really put the pressure on the Federal Reserve to accelerate its expected interest rate cuts.
The agenda
1:30pm BST: US non-farm payrolls (July; prev.: 206,000 jobs; cons.:176,000)
1:30pm BST: US unemployment (July; prev.: 4.1%; cons.:4.1%)
1:30pm BST: US average earnings (July; prev.: 3.9% year-on-year; cons.:3.7%)
Updated
