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The market has been geared up all week to see the August Employment Situation Report, and the price action thus far has made it look as if the soft landing optimism has gotten stuck in the gears.
Looking at things just ahead of the release, the 2-yr note yield was down 19 basis points for the week, the 10-yr note yield was down 21 basis points, the Russell 2000 was down 3.9%, the Nasdaq Composite was down 3.3%, the S&P 500 was down 2.6%, the U.S. Dollar Index was down 0.6%, oil prices were down 5.3%, the probability of a 50-basis points rate cut at the September FOMC meeting was 43.0% versus 30.0% a week ago, and the CBOE Volatility Index was up 32.7%.
In turn, there was more selling in the equity futures market this morning. Prior to the 8:30 a.m. ET release, the S&P 500 futures were down 26 points and trading 0.5% below fair value. That weakness stemmed from a lack of buyer conviction in front of the employment release, some perturbations related to the continued strengthening in the yen against the dollar, and the relatively disappointing fiscal Q4 revenue guidance provided by Broadcom (AVGO), which undercut many AI-related stocks.
Following the release, the S&P 500 futures worsened... and then got better. The knee-jerk action was a mixed emotions trade.
On the one hand, the nonfarm payrolls headlines were a bit deflating, coming in below expectations and accompanied by downward revisions to July and June that helped drive the 3-month average to a soft 116,000 from 141,000. On the other hand, there was still growth in nonfarm payrolls, the unemployment rate dipped to 4.2% (from 4.3%), and average hourly earnings increased a stronger than expected 0.4% month-over-month, which should be helpful for spending.
The key takeaway from the report is that it was not as good as hoped, but it also wasn't as bad as feared. It was a report, however, that meshes with the understanding that there is a slowdown in hiring activity that should translate into a slowdown for the economy.
It is a report, too, that will keep the Fed on track for a rate cut at the September FOMC meeting. In a speech this morning, New York Fed President Williams (FOMC voter) said, "it is now appropriate to dial down the degree of restrictiveness in the stance of policy by reducing the target range for the federal funds rate."
The fed funds futures has been frontrunning that idea. The only uncertainty is determining by how much the Fed will cut rates. Following today's employment release, the probability of a 50-basis points cut at the September FOMC meeting has spiked to 59.0% from 40.0% yesterday.
The 2-yr note yield skimmed 3.64%, but is at 3.69% now, down six basis points from yesterday. The 10-yr note yield kissed 3.66%, but is at 3.70% now, down three basis points from yesterday.
Notable headlines from the August Employment Situation Report:
- August nonfarm payrolls increased by 142,000 (Briefing.com consensus 165,000). The 3-month average for total nonfarm payrolls decreased to 116,000 from 141,000. July nonfarm payrolls revised to 89,000 from 114,000. June nonfarm payrolls revised to 118,000 from 179,000.
- August private sector payrolls increased by 118,000 (Briefing.com consensus 142,000). July private sector payrolls revised to 74,000 from 97,000. June private sector payrolls revised to 97,000 from 136,000.
- August unemployment rate was 4.2% (Briefing.com consensus 4.2%), versus 4.3% in July. Persons unemployed for 27 weeks or more accounted for 21.3% of the unemployed versus 21.6% in July. The U6 unemployment rate, which accounts for unemployed and underemployed workers, increased to 7.9% from 7.8%.
- August average hourly earnings were up 0.4% (Briefing.com consensus 0.3%) versus 0.2% in July. Over the last 12 months, average hourly earnings have risen 3.8%, versus 3.6% for the 12 months ending in July.
- The average workweek in August was 34.3 hours (Briefing.com consensus 34.3), versus 34.2 hours in July. Manufacturing workweek was little changed at 40.0 hours. Factory overtime increased 0.1 hour to 3.0 hours.
- The labor force participation rate held steady at 62.7%.
- The employment-population ratio held steady at 60.0%.
Currently, the S&P 500 futures are up one point and are trading roughly in-line with fair value, the Nasdaq 100 futures are down 36 points and are trading 0.2% below fair value, and the Dow Jones Industrial Average futures are up three points and are trading fractionally below fair value.
That is a setup for a mixed open following a mixed employment report.
