September 6, 2024
Tepid Jobs Report Opens Door to Larger Rate Cuts
A review of the week’s top global economic and capital markets news.
AUTHOR
Jonathan Hubbard, CFA
Managing Director,
Investment Solutions Group
For the week ending 6 September 2024
As of midday Friday, global equities were lower on the week, with US large-cap stocks volatile. The yield on the US 10-year Treasury note fell to 3.68%, down from 3.86% a week ago, while the price of a barrel of West Texas Intermediate crude oil fell to $70. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), rose to 19.6 from 15.5 last week.
MACRO NEWS
US payroll weakness points to soft landing
August payrolls in the United States rose by 142,000, missing expectations of 165,000, with losses in manufacturing, retail trade and information technology and gains in health care and construction. The prior two months’ data were revised lower. The slowdown indicates a soft landing as long as the deterioration in the labor market doesn’t accelerate. Treasury yields, which have been declining throughout August, fell further on the news, to 3.68%. Futures markets are now pricing in a 50-50 chance of a 25- versus 50-basis-point rate cut following the US Federal Reserve’s FOMC meeting on 17 and 18 September.
Second-tier labor data send mixed message
Several second-tier US labor readings also showed weakness this week, helping send bond yields lower ahead of Friday’s payroll report. The job openings and labor turnover survey on Wednesday showed fewer job openings in July than in the month before (7.7 million) while the June data (7.9 million, revised down from 8.2 million) were revised significantly lower. The ratio of the number of job openings to the number of unemployed has fallen below prepandemic levels, suggesting labor markets have loosened considerably. Thursday’s ADP national employment report, which approximates nonfarm payrolls (albeit with limited success), came in weaker than expected, showing 99,000 new jobs created in August, well short of the consensus estimate. However, those data weren’t confirmed by a drop in initial claims for unemployment benefits, which fell to a two-month low on Thursday. Finally, the Fed’s Beige Book, prepared for the upcoming FOMC meeting, painted a downcast picture, with most districts reporting flat or declining economic activity.
Crude under pressure
OPEC+ announced Thursday that it will delay a planned output increase by two months. Despite the delay, the price of a barrel of West Texas Intermediate crude oil fell below $70 on Thursday. The resolution of a supply disruption in Libya, slumping demand from China and concerns that the US economy may be slowing faster than expected helped send prices lower. Crude prices are approaching an area of strong technical support around $66, with greater weakness likely if it goes lower.
QUICK HITS
The British economy continued to rebound in August after a period of low growth at the beginning of the year. The services sector outperformed manufacturing in the US, eurozone and Japan. Manufacturing orders in the US were particularly weak. China’s economy remained near stall speed.
| Country or Region | Manufacturing PMI | Services PMI | Composite PMI |
| Eurozone | 45.8 unchanged | 52.9 ↑ from 51.2 | 51.0 ↑ from 50.2 |
| United Kingdom | 52.5 ↑ from 52.1 | 53.7 ↑ from 52.5 | 53.8 ↑ from 52.8 |
| Japan | 49.8 ↑ from 49.5 | 53.7 unchanged | 52.9 ↑ from 52.5 |
| China | 49.1 ↓ from 49.4 | 50.3 ↑ from 50.2 | 50.1 ↓ from 50.2 |
| US (ISM) | 47.2 ↑ from 46.8 | 51.5 ↑ from 51.4 | NA |
On Wednesday, the Bank of Canada cut its policy rate 0.25% to 4.25%, as expected. Another cut of 0.25% or possibly 0.50% is expected in October.
US vice president and presidential candidate Kamala Harris on Wednesday proposed a smaller capital gains tax hike than one earlier espoused by President Joe Biden. Harris wants to raise the rate from 20% to 28% on those with incomes above $1 million, less than the 39.6% rate Biden proposed in his latest budget.
Former US President Donald Trump said Thursday that he will end 10 regulations for every new one created and create a government efficiency task force while using tariffs to encourage production in the US. He also proposed cutting the corporate tax rate to 15% for companies that produce their products in the US.
Bank of Japan Governor Kazuo Ueda reiterated Tuesday that if the central bank’s outlook for inflation and the economy is on target, it will continue to raise interest rates.
The chief executive of Germany’s Volkswagen said this week that the company is considering closing plants in Germany as the country falls behind others in manufacturing competitiveness.
In retaliation against Canadian tariffs on electric vehicles, China announced it has opened an investigation into some agricultural and chemical imports from Canada.
The United Kingdom will suspend export licenses to Israel for arms used in military operations in Gaza.
Amid declining consumption, growth in Australia slipped to its slowest pace (except during the pandemic) since 1991, rising only 1% year over year in the second quarter.
The odds of a snap election in Canada rose on Wednesday when the New Democratic Party pulled out of its coalition with Prime Minister Justin Trudeau’s Liberal Party. The Conservative opposition plans a confidence vote.
The Spanish government named José Luis Escrivá governor of the Bank of Spain. Escrivá previously served as a minister in Prime Minister Pedro Sánchez’s government.
French President Emmanuel Macron named former European Union Brexit minister Michel Barnier as prime minister. Barnier will face considerable challenges in forming a government given that the National Assembly is split into three almost equally matched blocs representing the left, right and center.
With summer holidays at an end and bond yields declining, the US investment-grade bond market on Tuesday saw 29 deals totaling $43 billion priced, a one-day record.
US nonfarm productivity was revised to 2.5% in Q2, up from an initial 2.3% reading. That helped push the rise in unit labor costs down to 0.4% from 0.9%.
THE WEEK AHEAD
Highlights of economic data and events scheduled for next week:
On Monday, Japan will release final Q2 real GDP growth which is estimated to be 1.8%.
On Tuesday the UK will release July employment figures which are expected to show a 4.1% unemployment rate.
On Wednesday, the UK July will release industrial production growth, which is expected to have risen .2% from last month.
On Wednesday, the US is expected to report a CPI of 2.6% on a year over year basis.
On Thursday the European Central Bank is expected to cut its deposit rate to 3.50% from 3.75%.
On Friday Japan will report their July industrial production figure which were up 2.8% last month.
EARNINGS NEWS
The S&P 500 reported earnings growth of 11.3% in Q2 2024, in line with analysts’ estimates, according to FactSet. Despite strong overall earnings, several technology companies have sold off from lofty valuations in response to future growth projections. Investors are increasingly questioning the return on investment in AI as well as the durability of the revenue growth of the chip providers powering it.
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Past performance is no guarantee of future results.
Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
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