Day Ahead in U.S. and Global Markets

By Mike Dolan

Friday is poised to reflect the ongoing challenge in balancing the U.S. economy’s resilience against recession while seeking to reduce interest rates.

After a week filled with labor market and business updates, the August employment report is crucial, influencing both the Federal Reserve’s meeting this month and the sought-after “soft landing” for the economy.

Generally, the labor market is showing signs of slowing. Private sector payroll growth fell below expectations, layoffs are increasing, and job vacancies are decreasing. Nonetheless, a drop in weekly jobless claims presents a glimmer of hope.

For stock markets, a significant rise in the unemployment rate or a drop in job creation would amplify recession fears, akin to last month’s impact, though it could encourage a 50 basis point cut in Fed rates on September 18.

The return of a negative correlation between stocks and Treasury bonds may further stabilize mixed asset portfolios like the 60/40 equity/bond allocation.

Currently, S&P500 futures are down nearly 1% ahead of Friday’s opening, leading to the worst week for the index since April, while the VIX volatility gauge has climbed above 22.

Treasuries are rallying, resulting in a two-year yield decline to 3.70%, the lowest since May of last year. Ten-year yields have also fallen, maintaining an inverted yield curve.

The dollar has returned to late August levels as market consensus anticipates payroll growth of 160,000 and a decrease in the unemployment rate to 4.2%.

Attention has been on the jobless rate since it activated the “Sahm rule” last month, which links rising rates to potential recession signals. The rule’s founder, ex-Fed economist Claudia Sahm, downplayed the current significance, but it remains a concern unless the rate drops in August as forecasted.

Futures are indicating nearly a 50% chance for a 50 bp rate cut this month, with expectations of significant easing by year’s end.

Following the employment report, Fed leaders Christopher Waller and John Williams will respond, before entering a blackout period prior to their upcoming meeting.

Janet Yellen, U.S. Treasury Secretary, recently stated that despite slowed job creation, the U.S. labor market remains healthy.

The Fed has shifted focus toward job market health, aiming to ease rates this month. With U.S. crude dropping below $70 per barrel, inflation remains under control.

Tech Sector Insights

In the tech sector, concerns linger regarding high valuations for chipmakers. Broadcom recently revised its fourth-quarter revenue forecast downward due to decreased broadband spending, causing its shares to drop over 7%, despite increased AI chip orders.

Conversely, Qualcomm is considering acquiring parts of Intel’s design business to strengthen its offerings.

Upcoming is Apple’s anticipated iPhone launch, expected to feature new AI capabilities.

Political Developments

Markets are also preparing for the first televised debate between Republican candidate Donald Trump and Democratic candidate Kamala Harris next Tuesday. Both candidates have presented economic proposals, with Harris advocating for lower capital gains taxes while Trump suggests a corporate tax rate as low as 15%.

Globally, European and Asian stock markets faced downward pressure ahead of the U.S. payroll report. Notably, Raiffeisen Bank’s shares plummeted by 7% after a Russian court action against its local unit.

Key Developments to Watch:

• U.S. August employment report
• Canada August employment report
• Speeches from Fed’s Waller and Williams post-payroll report