Weak US August payrolls data fuels recession fears

US jobs data on Friday provided further evidence of a softening labour market. 142k new jobs were added last month, up from July’s (revised) 89k but lower than the 165k that the market had been expecting. The unemployment rate was fractionally lower at 4.2% from 4.3% in July but average hourly earnings came in hotter than expected at 0.4% m/m and 3.8% y/y.

The household survey indicated that the unemployment rate continues to be driven by new entrants (or re-entrants) to the labour market, rather than layoffs, which is encouraging. However, downward revisions to the June and July readings suggest that overall job growth has slowed sharply since March, with the 3-month average at just 116k in August. It’s unclear if Friday’s jobs data is enough for the Fed to cut rates by 50bp when they meet next week, and Wednesday’s inflation data will be closely watched. The market is pricing 33bp in easing in September as of Friday’s close, with more than four 25bp cuts priced by the end of the year.

Japan’s GDP growth was revised lower to 2.9% q/q annualized in Q2, down from a preliminary estimate of 3.1%. Both private consumption and investment were revised lower. Analysts expect the BoJ to continue to gradually tighten monetary policy next year.

Both CPI and PPI in China came in lower than forecast in August at 0.6% y/y and -1.8% y/y respectively. The modest increase in CPI was partly due to higher food prices caused by bad weather rather than strong domestic demand. Measures taken by policy makers to boost domestic demand don’t appear to be having the desired result, and analysts expect further easing on monetary policy from the PBOC, perhaps as soon as this month.

German industrial production was weaker than expected in July, declining -2.4% m/m and -5.3% y/y. The decline was due to automotive output, which may remain weak going forward as Volkswagen is reportedly considering factory closures in Germany. French industrial production data was also weaker than forecast in July, with declining car production a key contributor here too. The ECB is expected to cut rates at its meeting later this week.

Saudi Arabia’s economy contracted -0.3% y/y in Q2 as a result of sharply lower oil production relative to Q2 2023. The kingdom implemented voluntary production cuts of 1mn b/d in July 2023, which are now in the base. Non-oil sector GDP grew 4.9% in the second quarter, faster than the preliminary estimate of 4.4% y/y. Utilities (8.9% y/y), trade and hospitality (6.8% y/y) and construction (5.7% y/y) were the fastest growing sectors on an annual basis.

No key economic data and events today

Fixed Income

• US treasuries rallied and yields declined after weaker than expected jobs data and dovish comments from the Fed’s Waller boosted prospects for a 50bp cut from the Fed this month. Governor Waller said he was “open-minded” about the prospect of a bigger rate cut if the data warranted it. The 2y yield fell almost -10bp to 3.65% on Friday, down -27bp w/w. The 10y yield eased to 3.71% from 3.73% on Thursday, down around -20bp w/w.
• Most developed market bond yields fell last week with the 10y gilt yield down -17bp w/w to 3.86% and the 10y bund yield down a similar magnitude to 2.2%.

FX

• The US dollar weakened against a basket of major currencies last week as markets repriced the prospect of faster easing by the Fed. Bloomberg’s dollar index was down -0.5% w/w with JPY the main beneficiary. JPY gained 2.6% w/w against the dollar while CHF appreciated 0.8%. The EUR strengthened 0.3% and GBP was largely unchanged.
• Commodity currencies were broadly weaker against the USD with AUD down -1.4% w/w to 0.6671 and NZD down -1.2% w/w.

Equities

• Global equity markets were largely in the red on Friday as weak US employment data reignited recession fears in the world’s largest economy. The S&P500 had its worst week since March 2023, closing down -3.3% w/w while the Nasdaq100 had its worst week since 2022, losing -4.7% w/w. European benchmark indices were also in the red last week with the EuroStoxx50 down -4.4% and the FTSE100 down -2.3% w/w.
• GCC markets were mixed with the DFMGI and the ADXGI up 1.1% and 1.8% w/w respectively, while the Saudi TASI fell -1.9% w/w.

Commodities

• Commodity markets were not spared in last week’s rout. Brent and WTI declined -7.6% and -10.9% w/w respectively as recession fears heightened. Gold prices fell -0.8% on Friday and lost -0.2% w/w, while silver fell -3.2% w/w.