The job market is clearly slowing down. Nonfarm payroll for August came in at 22K, the lowest in 4 years. This did come with an upward revision of July from +73K to +79K. The U6 Unemployment rate, a broader measure of job seekers, is now 8.1%, the highest level since mid-’21.
This is good news for interest rates: The September Fed cut is assured, and a 50bps cut is back on the table. The US 2-year yield plummeted 11bps to 3.47%, the lowest since Jan’22. The 10-year is down 9bps to 4.08%. The 30-year is down 8bps to 4.79% and is creating a rally in international long bond rates.
But it’s not all good news. The labor weakness is so soft that it has apparently brought recession fears. Stocks surged initially as interest rates plummeted, then quickly reversed into the red. The VIX dropped from yesterday’s close of 15.3 to 14.7, then whipsawed to 16.2.
How can lower interest rates not be good for the economy? It will squeeze CD rates, especially painful for seniors living on a fixed income. The expectation of a series of cuts will incentivize waiting for rates to go lower before making financial commitments. If labor continues to weaken, on top of already high consumer debt levels and high delinquency/ default rates, recession fears may take a real bite out of stock prices as investors start locking in healthy gains before they fade.
Adding to the downdraft today is further weakness in NVIDIA (NVDA), down another 4%, now down 7.4% in a week, another sign of profit taking. Microsoft (MSFT) is down 2.5% as the Magnificent 7 is headed towards down 1%, after first hitting a new all-time high on the open. Tesla (TSLA) is the only name in the group in the green, +2.1%, after announcing a new proposed pay package for Elon Musk, which would make him a trillionaire if Tesla hits some very aggressive milestone targets.
On the commodity front, gold and silver continue to advance to new highs, another expression of recession risk. Crude oil is down again, to $61.74/bbl, the lowest since April, taking energy names down 2.1%. The US dollar index is down 0.8 to 97.5, the lowest in 6 weeks. Crypto is modestly higher with Bitcoin at $110.5K.
We’re already seeing signs of dip buyers moving in, and it won’t be a surprise if we end the day in the green.
Lower interest rates are a powerful stimulus to the economy, all else being equal, especially in the important housing market. While it will pinch savers’ interest income, it should also bring a lot of new funds out of money markets looking for better yields into stocks and bonds.
The trend remains positive, but September’s reputation for volatility remains intact. If the job market stabilizes, prospects for the 4th quarter continue to look bright.
