Mayhem in markets
Friday’s softer than expected US labour market report for July elicited a dramatic reaction, with the market pricing in aggressive Fed rate cuts, bond yields plunging, stocks selling off sharply, and the dollar losing ground, though some relative calm has been restored for now following better than forecast US economic data yesterday. In FX, the euro has gained more than 1.5 cents from last Thursday’s low of just under $1.0780 against the dollar to trade at around $1.0940 currently, having hit $1.10 for a time yesterday, while sterling’s gains against the US currency have been more modest, trading at about $1.2750 from a low late last week of just over $1.27. This in turn sees EURGBP at around £0.8575 this morning, up from about £0.85 just before Friday’s data and its highest level since mid-May.
Post the labour market data, the market is now pricing in an almost 90% chance of a 50bps rate cut at the Fed’s next meeting in September, with more than 100bps worth of cuts in total seen by the end of this year. US bond yields have fallen noticeably as a result, with 2-year yields down almost 20bps from last Thursday’s close (though they had been down considerably more at one stage yesterday) and 10-year yields off around 15bps over the same period. In equity markets, the S&P 500 closed 3% lower yesterday after shedding 2% on Friday, though a dramatic recovery in the Japanese Nikkei index overnight (+10%) following an even more dramatic decline (-12%) the previous session, should pave the way for a rebound in US/European stocks today.
The US economy added 114k jobs in July, a good bit shy of the 175k increase expected, while the unemployment rate rose to 4.3% (from 4.1% in June), the latter in particular triggering fears of impending recession, while annual wage growth slowed to 3.6% from a downwardly revised 3.8% the previous month. Yesterday’s ISM services data were slightly better than expected and suggested this sector of the economy expanded n July, helping to assuage recession concerns somewhat.
In comments yesterday, Fed member Daly said “the labour market is slowing, and it is extremely important that we not let it slow so much that it tips itself into a downturn,”, adding that “policy adjustments (i.e. interest rate cuts) will be necessary in the coming quarters.” Her Fed colleague, Goolsbee also acknowledged the “weaker job numbers”, although he said they didn’t “indicate a recession”, and suggested interest rate cuts are on the way.
It is relatively quiet on the economic data front this week – which may not necessarily be a good thing as it leaves markets operating in something of a vacuum – with Euro area retail sales today and US jobless claims and producer prices on Thursday and Friday respectively, while there are a couple of Fed members due to speak over the course of the week.