U.S. job growth slowed more than expected in July, with just 114,000 jobs added, and the unemployment rate rose to 4.3%, which could heighten concerns that the job market is deteriorating and could tip the economy into recession. Hurricane Beryl knocked out power in Texas and devastated parts of Louisiana during the employment survey week, which may have contributed to the smaller-than-expected payrolls gain.
Average hourly earnings rose 0.2% last month after increasing 0.3% in June. In the 12 months through July, wages increased 3.6%. That was the smallest year-over-year gain since May 2021 and followed a 3.8% gain in June. The jobs report set the stage for the Federal Reserve to cut interest rates in September. The unemployment rate rose for a fourth straight month, which could heighten concerns about the durability of the economic expansion by triggering a highly accurate recession warning.
Sahm, the originator of the concept of "Sahm's Law", commented on the July unemployment rate in the United States and said that this time "even if the unemployment rate exceeds the critical value of Sahm's Law, a recession will not be imminent." The so-called Sahm's Law is named after Claudia Sahm, a former Federal Reserve economist who proposed this law. She found that if the unemployment rate (based on a three-month moving average) rises by half a percentage point from last year's low, a recession has almost always begun. Every recession in the United States since 1970 has triggered an increase in the unemployment rate. It has only been falsely reported twice since 1959; in both false alarms in 1959 and 1969, it was triggered a few months before the start of the recession, but it was too early.
In addition, the number of non-farm payrolls in the United States in May and June was revised down by 29,000. The U.S. Bureau of Labor Statistics said that the number of new non-farm payrolls in May was revised from 218,000 to 216,000; the number of new non-farm payrolls in June was revised from 206,000 to 179,000. After the revision, the total number of new payrolls in May and June was 29,000 lower than before the revision.
Financial review site Zerohedge said that in the past six employment reports, five have been revised down. In fact, in the past 14 employment reports, 10 have been revised down. Not only is the unemployment rate at a three-year high, but revisions to employment reports have become the new normal. So far, hundreds of thousands of jobs have been revised down in 2024 alone.
Institutional analysis believes that the focus of market discussion has quietly shifted, and the topic about the Federal Reserve will be quickly adjusted to adapt to the current situation. Regardless of how much uncertainty there was in the market about whether the Federal Reserve would cut interest rates, the topic is likely to shift to how many times the rate will be cut. The money market has increased its bets on the Federal Reserve to cut interest rates by 50 basis points in September, while increasing expectations that the Federal Reserve will cut interest rates by more than 100 basis points before the end of 2024. This is the most dovish trader expectation in this cycle.
"A 50 basis point rate cut is possible but unlikely given the Fed's cautious approach," said Melissa Brown, managing director of applied research at Simcorp. "It will depend on the data in the coming weeks. Hourly earnings are slightly lower, which means the next inflation report will be very important, reflecting overall inflation versus income growth."
Current U.S. Treasury yields still reflect this shift in outlook, falling sharply after data today showed the U.S. labor market was cooling faster than expected as traders weighed the prospect of a hard landing for the economy.
CIBC Capital Markets economist Catherine Judge said it makes sense to expect three rate cuts by the end of the year. This report is clearly consistent with the Fed's expectations for a rate cut in September and increases the likelihood that the economy will need three rate cuts this year, rather than the two we currently expect, but more important indicators, including inflation data, remain before the Fed makes a decision to cut rates.
Jeffrey Rosenberg, portfolio manager at BlackRock, said that the overall performance of the non-farm report was disappointingly weak. The question now is that the 50 basis point rate cut in September has been reflected in market pricing. Does this mean that the Federal Reserve needs to cut interest rates by 50 basis points? He pointed out that the most interesting thing at the moment is that the Russell 2000 index led the market down, whether it was an overreaction or not, but the market was clearly reacting in this way.
The unemployment rate in the United States may continue to rise. Will it be too late for the Federal Reserve to cut interest rates in September? Wasif Latif, president and chief investment officer of Sarmaya Partners, said that the market now realizes that the economy is indeed slowing down. The unemployment rate is an autocorrelation function number, so once it starts to move in a certain direction, it usually continues to trend. The Federal Reserve relies on data, and now that the data is out, they may do what they need to do in September, but September is a bit far away for the market, and the market is currently in a panic. He said that in this environment, bond prices are expected to rise due to factors such as economic slowdown and investors turning to high-quality assets.
The article is forwarded from: Jinshi Data
