Sarah Travers
In a significant market shift, stocks took a hit while bonds rallied following the release of weak economic data. The concerns over the Federal Reserve’s delayed rate cuts have led to Treasury 10-year yields dropping below the 4% mark, with market expectations now fully pricing in three rate reductions this year.
As the US jobs report looms, recent data revealed that unemployment claims have surged to their highest in nearly a year, and manufacturing activity has contracted at its fastest pace in eight months. Typically, policy easing is favorable for corporate America; however, the prevailing economic jitters have sent equities on a downward trajectory.
Federal Reserve Chairman Jerome Powell has indicated that officials are likely to cut rates in September unless inflation shows signs of stalling. This stance is in response to the risk of further weakening in the job market. The upcoming monthly employment data is expected to intensify this debate, as unemployment is approaching a threshold that could trigger a recession indicator known as the “Sahm rule.” This rule, developed by former Fed economist Claudia Sahm, has a perfect track record over the past fifty years.
Economic analysts have highlighted the ongoing deterioration in economic data. They suggest that the Federal Reserve risks appearing behind the curve until it begins cutting rates. The labor market has been flashing warning signals for several months, raising concerns that waiting too long to start cutting rates could be detrimental.
In the financial markets, Treasury 10-year yields fell five basis points to 3.98%. The S&P 500 index saw a 1% drop, driven by a decline in key stocks such as Qualcomm Inc., which fell due to concerns over a slower-than-expected recovery in the phone market. Conversely, Meta Platforms Inc. experienced a jump following a sales beat. The performance of Apple Inc. and Amazon.com Inc. in their upcoming earnings reports will be critical for the Nasdaq 100’s direction after a volatile period.
The pound also slid after the Bank of England announced a rate cut and signaled further cautious reductions ahead. A scenario where a rate cut is accompanied by the Federal Reserve expressing concerns about the economy could be viewed negatively for stocks, though this is considered unlikely.
At Capital Economics, further decline in manufacturing raises the risk that US growth could lose momentum in the third quarter. Additionally, a significant drop in the employment index heightens concerns that the Fed may have delayed loosening policy too long.
While the Fed has been clear about needing more evidence of soft inflation to cut rates, a slowing labor market might prompt more aggressive rate cuts, potentially moving up the timeline for reductions to include November in addition to September and December. Recent data has shown rates moving sharply lower due to a combination of a more dovish Fed, moderating economic data, and geopolitical risks. This trend could continue if economic readings weaken further, exacerbating the bull steepening trend in bond markets.
The Federal Reserve’s potential rate cuts have become a hot topic among global investors. The term “Federal Reserve” was on track to be mentioned about 380 times in second-quarter earnings calls with analysts, according to a Bloomberg analysis, marking the highest tally since 2001.
In corporate news, several companies announced significant updates. Moderna Inc. saw a sharp decline after lowering its 2024 sales forecast, attributing the reduction to weak demand for its Covid vaccine in Europe. Biogen Inc. raised its profit outlook due to cost-cutting measures and faster sales of new drugs. Wendy’s Co. trimmed its annual sales guidance as US customer traffic declined, and Hershey Co. cut its sales and earnings outlook amid reduced consumer purchases of high-priced chocolates and candies. WeightWatchers announced layoffs and cost-cutting measures in response to competition from blockbuster obesity drugs.
Meanwhile, R1 RCM Inc. will be acquired by TowerBrook Capital Partners and Clayton, Dubilier & Rice for $8.9 billion in an all-cash deal. Mobileye Global Inc. saw a significant drop after slashing its annual forecasts due to customers scaling back production plans. In legal news, Alex Beard, the former head of oil at Glencore Plc, was charged with corruption by the UK’s top fraud agency, alongside four other former employees from the commodities trader.
