Markets are flighty, nervy and choppy this week – recession concerns are rising after some soft data and a key jobs report ahead today will be pivotal to market sentiment. Wall Street is down 2-3% this week and the European bourses are also down similarly and tracking lower this morning, whilst US futures are also down. China stocks hit a 7-month low overnight, whilst the yen advanced to 142 in a further sign of concern that we get more repeats of the carry unwind from early August. Oil is at YTD lows and not even a move by OPEC to delay a planned increase in output has lifted the spirits. Recession fears are dominating market sentiment. 

 In the latest sign of weakness in the US economy, August private payrolls grew by 99,000 — the smallest increase since 2021 and well below forecasts. Meanwhile the Fed’s latest Beige Book survey of the economy was one of the most downbeat in a long time, particularly around hiring.  Earlier in the week Labor Department figures showed job openings in July tumbled by 237,000 to 7.673 million. That was the lowest since February 2021 and much worse than the 8.09 million expected. June job openings were revised lower from 8.230 million to 7.910 million. There was a big drop in construction sector, which is a key cyclical indicator. 

 Now we look to the BLS nonfarm payrolls today, which is expected to hit 161,000 after 114k in July, whilst the unemployment rate is expected to tick down to 4.2% from 4.3%. The average hourly earnings is expected at 3.7% vs. 3.6% prior.  

The focus will likely fall on the unemployment rate after the recent triggering of the Sahm Rule – when the unemployment rate increases half a percentage point from the previous 12-month low, a reliable recession indicator. Soft payrolls mayshould see stocks sell off and bonds rally into a bull steepener, and yen carry unwind worsen. Oil could make new lows. 

Markets now see a 43% chance of a 50bps cut at the upcoming Fed meeting – my worry is that this looks a bit panicky. But markets are already starting to fret a lot more.  

Since Wednesday the 2yr yield is down about 15bps to almost 3.72%, its lowest since May 2023, whilst the spread between the 2yr yield and Fed funds target is at the widest since 2008, which I believe did not turn out to be that good. The yield curve also disinverted, flattening out such that the 10yr yield rose above that of the 2yr for the first time since Jun 2022, ending the longest inversion in history.  

Why does this matter? Disinverting is not necessarily a good thing. In fact it’s just a sign that the market thinks the Fed is about to cut a lot as the economy goes into a recession. In fact, the last four recessions started after the yield curve became disinverted again. 

…now just waiting on the BLS data at 13:30 BST 

Neil Wilson

Chief Market Analyst at Finalto

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