Stock markets received the employment report they were waiting for. The official data on the US labor market was supposed to serve as a guide for investors, but it left a bad taste in the mouth. Instead of dispelling doubts about the extent of the Federal Reserve (Fed) rate cut and whether the country is heading for a recession, the figures left more questions than answers. This lack of conclusions led to an initial attempt at a rebound, but a subsequent more negative reading triggered an explosion of panic in the stock markets, similar to that experienced in early August due to fears of an imminent crisis.
Fears of an imminent recession hit the markets on Friday, coinciding with the release of a cascade of US employment data. In recent days, the figures have reflected the weakness in the labor market already observed and red has predominated on the stock markets. But it remained to be confirmed with today’s key data whether this fear of a forced landing was justified, even if it remains difficult to clarify the mystery. Official figures from the US Department of Labor They have shown this deterioration in employment, but they neither confirm nor deny the recession.
On the one hand, 142,000 nonfarm jobs were created, below the 165,000 expected but comfortably above July’s level. Meanwhile, the unemployment rate fell to 4.2% from 4.3% in August, a slight improvement. Today’s report paints a mixed picture, sending conflicting messages.
Recession in sight?
One of the main concerns of the market is that the current data be revised downwards, as has happened the two previous times. “Can we really trust the data? There have been downward revisions over the last couple of months and we already know there are more revisions coming – and they could be substantial,” said James Knightley, chief U.S. and international economist at ING. The U.S. data overstated the job creation figure by 78,000 jobs per month over the 12 months through March of this year, he said, making further downward updates very likely.
Berenberg’s chief economist acknowledges that the non-farm payroll figure is “the least reliable” due to its continuous revisions, and that the various employment data must therefore be analyzed as a whole (JOLT, ADP, etc.). “So far, the labor data indicate a significant loss of momentum consistent with a soft landing scenario,” says Holger Schmieding, who also does not rule out a further cut in future analyses.
There is another negative aspect to reading the data, besides the threat that the data will be revised and worse, and that is what analysts agree on. gradual slowdown in the labor market. The jobs being created are part-time and lower-paid, while quality jobs are being destroyed, according to ING. “Unfortunately, all recessions start this way,” Knightley laments. “Overall, today’s report is quite consistent with the economy slowing down, but not collapsing,” said Tiffany Wilding, an economist at PIMCO.
Volatility of reduction expectations
But beyond this evidence, It is difficult to anticipate a recession and to assert that this is the final fate of the American economy. Doubts between a soft landing and a hard landing persist. This means that the balance between a cut or a double cut in interest rates has not yet been decided. “The debate on 25 or 50 basis points remains unresolved,” ING points out in another commentary.
In fact, market expectations on this matter continue to evolve at the time of writing. In this sense, the probability of a 0.50% jumbo rate cut rose to 47% earlier today in the US, compared to 39% yesterday. However, this percentage has now fallen to 27%, while the options for a 0.25% rate cut stand at 73%. This means that traders do not consider the situation serious enough to implement a 50 basis point cut. Even though the market is currently moving towards the standard discount, volatility reigns and the positions could have changed again in the last minutes. In this sense, The VIX fear index stands at 15.28%.
The fact that the employment report did not dispel investors’ doubts creates more uncertainty. Its release was essential for the market to accurately interpret the other macroeconomic reports released this week. With all the doubts on the table, the concern grew as the day went on, as Wall Street started mixed and then turned red and extended losses to 2.7% on the Nasdaq 100. The bag Yankee is on track to close its worst week of 2024, with a cumulative drop of more than 5.5% in the technology index.
In Europe, the deepening of the falls on Wall Street caught up with the indices with the closing, so they were infected. The European markets recorded a decline, marking the worst week since August 5, the day nicknamed Black Monday. In this sense, the Ibex 35 lost 2% in the last five days, while the German Dax 40 lost 3%. For its part, the EuroStoxx 50 fell 4% each week, weighed down by the cumulative 16% drop of ASML, a company that was affected by volatility and technological weakness. On the other hand, the British FTSE 100 index recorded a weekly decline of 2%, while the French Cac 40 lost more than 3%. Finally, the Italian FTSE MIB index fell 3% in the last five days.
Scott Wren, an analyst at Well Fargo Investment Institute, points out that this volatility will continue in the near term. Moreover, Wren believes that the markets’ attention will continue to focus on the same two factors: the degree of moderation of the Fed’s monetary policy and the pace of the economic slowdown in the United States.
This week has been characterized by fear of recession, perhaps the shadow that has cast over the price. With the jobs report not having solved the problem, we will have to wait for the US inflation data next week to get more clues. Although the Fed has already stated that its analysis focuses on the labor market and its evolution, the lack of answers calls for the CPI data.
