Global Asset Exodus!
The latest non-farm payroll report has set off what could be a significant wave of selling in financial markets. The weak employment figures have intensified worries about a slowing U.S. economy, leading to a rough day for stocks in both Europe and the United States on Friday. Compounding these concerns were disappointing earnings reports from major players like Amazon and Intel, which have put the future of the artificial intelligence sector under fresh scrutiny. This turbulence among heavyweight stocks has further heightened market panic and increased capital flight, with investors flocking to safe-haven assets.
The alarm bells are ringing for a possible recession following the latest non-farm payroll figures. According to a report released by the U.S. Labor Department, the U.S. added just 114,000 jobs in July, a record low for the year, while wage growth slowed to 3.6%, marking its lowest point in almost three years. These figures suggest that cracks are beginning to appear in the labor market, which is often seen as a last bastion of strength for the U.S. economy.
For much of the past year, even as other economic indicators showed signs of fluctuations, the job market had remained robust. However, since the second quarter, non-farm payroll data started to show a significant cooling trend, aligning with private sector surveys indicating a steady uptick in unemployment rates. The unemployment rate recently rose from 4.1% to 4.3%, triggering a well-known warning signal known as the "Sam Rule." This rule posits that a three-month average of unemployment rates exceeding the 12-month low by 0.5 points often indicates that the economy is already in a recession. Since 1950, this guideline has been accurately validated across all 11 U.S. economic downturns.
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As the second half of the year kicks off, the U.S. economy appears to be facing a number of headwinds. Accompanying the dismal regional manufacturing index, the ISM manufacturing index for July fell to an eight-month low of 46.8%, which suggests further contraction in manufacturing across the nation. Behind this downturn plateaus consumer demand and confidence, as illustrated by the latest consumer confidence index from the University of Michigan, which remains stagnant at low levels throughout the year. Furthermore, the Federal Reserve's Beige Book has indicated that contacts within their network believe GDP growth will face significant challenges for the remainder of the year.
During a recent interest rate meeting, the Federal Reserve opted to keep rates unchanged but hinted at potential cuts in September. Chairman Jerome Powell voiced his concerns about possible drastic shifts in the labor market. Consequently, the latest data will undoubtedly act as a wake-up call for the Federal Open Market Committee (FOMC). Trading in federal funds futures indicated that the probability of a 50-basis-point rate cut in September has surged to 80%, with expectations rising for a total decrease of over 110 basis points for the year.
Boris Schlossberg, a macro strategist at BK Asset Management, shared insights with reporters emphasizing that the pertinent question isn’t whether the Fed will cut rates in September but rather whether any cuts might exceed 25 basis points. He noted that as discussions about a recession and criticisms of the Federal Reserve grow louder, financial strategists are rapidly reassessing their outlook for the central bank's monetary policy. Goldman Sachs now anticipates that the Fed will implement three consecutive rate cuts this year, and should the August non-farm payroll report also yield disappointing results, a 50-point rate cut would likely follow.
According to Citi, the Federal Reserve will likely cut rates by 50 basis points at meetings in September and November, followed by a further 25 basis point cut in December. Previously, they had predicted cuts of 25 basis points at all three of these meetings. J.P. Morgan economist Michael Feroli shares a similar forecast for cuts in September and November but warned that Powell may be hesitant to introduce unnecessary uncertainty into the markets.
In the wake of these developments, risk assets have begun to experience a mass sell-off. The U.S. stock market has been undergoing a fresh sell-off since Thursday, particularly impacting highly valued technology stocks, with investors pivoting towards defensive sectors. Angelo Kourkafas, a senior investment strategist at Edward Jones, commented that the perception of rate cuts as a measure primarily to combat inflation had been challenged by emerging signs of weakness.
Following a string of disappointing earnings reports from major corporations like Tesla and Google, Intel and Amazon have found themselves mired in negativity. Intel shares plunged nearly 25% on Friday after the company reported second-quarter results that fell well short of expectations. Additionally, they released disappointing guidance for the third quarter and announced plans to cut approximately 15% of its workforce (around 15,000 employees) in the year ahead.
Amazon also saw its shares plummet by over 10% during the trading session. The e-commerce giant is grappling with a slowdown in its core online sales while also ramping up capital expenditures to invest in artificial intelligence infrastructure and development, with second-quarter spending estimated at around $16.5 billion. Last month, both Google's parent company Alphabet and Microsoft declared their intentions to maintain high levels of spending throughout the year to support the development of costly artificial intelligence software and services. This shift has led investors to interpret such moves as indicators that returns on this hot technology may take longer to materialize than initially anticipated.
As major tech companies report their earnings, previously elevated expectations are proving to be a double-edged sword in terms of investor sentiment. In a broader context, signs of unease are surfacing across the market, with the Chicago Board Options Exchange's Volatility Index (VIX) soaring over 40% as the trading day closed.
In the foreign exchange realm, the Japanese yen surged 1.7% against the dollar, approaching the critical 146 mark, and logged a weekly rise of over 6% as safe-haven flows bolstered the yen. The Swiss franc also benefited from heightened risk aversion, rising against the dollar to reach a nearly seven-month high of 0.856. Similarly, the euro and the Chinese yuan both gained ground against the dollar, outpacing its declines on that particular day.
Examining the commodities market, gold spiked post non-farm data release, climbing to $2,510 per ounce, a fresh all-time high. In stark contrast, oil prices took a hit amid renewed recession fears, with international benchmarks dropping over 3% by the end of the session, completely erasing the risk premium associated with recent worries over escalating tensions in the Middle East earlier that week. Phil Flynn, a senior market analyst at Price Futures Group, highlighted that the deluge of disappointing U.S. economic data has reignited fears over demand as markets grapple with concerns that the world’s largest economy could be on the brink of recession.