U.S. Job Market Update

By Sinéad Carew and Nell Mackenzie
NEW YORK/LONDON (Reuters) – MSCI’s global equities gauge fell more than 1% on Friday, and U.S. Treasury yields dropped as investors worried about the health of the economy following a mixed U.S. jobs report. This report confirmed expectations for the Federal Reserve to lower interest rates this month but created uncertainty regarding the size of the cut.

The Labor Department reported that U.S. employment increased less than expected in August, while the jobless rate dropped in line with expectations to 4.2%, down from 4.3% in July, indicating a gradual slowdown in the labor market.

Nonfarm payrolls rose by 142,000 in August, falling short of the expected 160,000 growth. Additionally, July’s numbers were revised down from 114,000 to 89,000.

Brian Jacobsen, chief economist at Annex Wealth Management, commented that, “The headline number of 142,000 would ordinarily be considered healthy, but this labor market is held together by duct tape and string.”

By Friday afternoon, traders speculated a 73% chance the Fed would cut rates by 25 basis points this month, up from 60% on Thursday, while expectations for a 50 basis point cut dropped from 40% to 27%, according to CME Group’s FedWatch tool. Fed officials suggested they would begin rate cuts at their upcoming meeting, noting that a cooling labor market might worsen without a policy shift. These comments were perceived as supportive of a 25 basis point cut while allowing for potential larger adjustments if the job market continues to slow.

Jacobsen noted, “Could the Fed cut by 50 bps? Yes, but will they? No. They probably want to start with 25 and retain the option to increase that to 50…”

Wall Street indexes closed sharply lower after initially opening higher as investors reacted to the jobs report. The Dow Jones Industrial Average fell 410.34 points (1.01%) to 40,345.41, the S&P 500 dropped 94.99 points (1.73%) to 5,408.42, and the Nasdaq Composite lost 436.83 points (2.55%) to 16,690.83. MSCI’s gauge of global stocks also decreased by 10.79 points (1.33%) to 801.88, marking a weekly decline of 3.9%, the deepest since the week of July 29.

Earlier, Europe’s STOXX 600 index closed down 1.1%, and Germany’s DAX index decreased by 1.5% after reports showed a 2.4% decline in industrial production for July against analyst expectations of a 0.3% drop.

In the bond market, the benchmark 10-year Treasury yields fell post-payroll report but rebounded from a 15-month low reached earlier. The yield on U.S. 10-year notes decreased by 1.2 basis points to 3.721%, while the 2-year note yield also fell significantly.

A crucial part of the U.S. Treasury yield curve, measuring the yield gap between two- and 10-year Treasury notes, remained positive at 5.8 basis points, often seen as a gauge for economic expectations.

In currency trading, the dollar index rose amid shifting expectations for upcoming rate cuts post-September, though analysts view a half-point rate cut as unlikely. The index gained 0.14% to 101.18, while the euro decreased by 0.21% to $1.1087, and against the yen, the dollar weakened by 0.76% to 142.35.

In energy markets, oil prices fell more than 2%, marking their fifth consecutive day of declines, overshadowed by concerns over weak U.S. job figures. U.S. crude futures settled down 2.14% at $67.67 per barrel, their lowest close since June 2023, while Brent crude slipped to $71.06, its lowest close since December 2021. Gold prices also saw a decline from near-record levels, with spot gold decreasing by 0.81% to $2,495.86 an ounce.