Investing.com

Equity markets are beginning to question if a 25 basis point cut is enough response to weaker-than-expected nonfarm payrolls data, according to analysts at Morgan Stanley.

Investors now largely agree that the Fed will reduce borrowing costs from a 23-year high of 5.25% to 5.5%. This follows labor market data indicating the US economy added 142,000 jobs last month, an increase from the revised figure of 89,000 in July. Economists had anticipated a figure of 164,000, up from July’s initial mark of 114,000.

“The equity market was looking for clear signals that July’s payroll weakness was weather-related and due to one-off factors,” the Morgan Stanley analysts commented in a note to clients. “Instead, softness persisted…”

After the data release on Friday, key averages on Wall Street declined. For the week, the benchmark S&P 500 and the 30-stock Dow Jones Industrial Average recorded their largest weekly drops since March 2023, while the tech-heavy Nasdaq Composite noted its biggest dip since January 2022.

The Morgan Stanley analysts anticipated that, in response to the labor market data, the Fed would implement a 25-basis point rate cut at its next two-day meeting from September 17-18, followed by a “series” of similar reductions at consecutive meetings. Current borrowing costs are at a 23-year high of 5.25% to 5.5%.

They also noted that equity markets, apprehensive that the data may indicate a downturn in the labor market, would only consider a 25-basis point cut as “adequate” if the Fed signals further significant reductions in future meetings, along with other supportive measures such as halting quantitative tightening by year-end.

The analysts projected that, amid possible slowing job demand and softening economic growth, quality and defensive stocks should continue to outperform.