Trading in the first full week of the month started sluggishly, as government bond yields dropped and volatility surged.
Overall, the large-cap S&P 500 lost 4.25%, the Nasdaq 100 decreased by 5.89%, and the Dow Jones Industrial Average was lower by 2.93%.
Mixed Jobs Data
As equity markets struggled last week, attention turned to Friday’s payrolls data–with expectations for 161,000 jobs. The actual August payroll data showed 142K jobs created, missing expectations. This data comes after a recent revision lowering the jobs created by 818K over a rolling 12-month period, so the market’s response to the miss was rather notable.
Reactions by traders were sour as the broader market indexes drifted lower, cementing the worst week for the S&P 500 since 2023. On a positive note, we got a drop in the unemployment rate, dipping to 4.2% from the previous reading of 4.3%.
Overall, the results were disappointing on the labor market front, but the result could increase the Fed’s chances of a 50 bp cut versus a 25 bp cut at the upcoming September 18th meeting.
Government Bond Yields Fall
As equities and oil slid last week, so did government bond yields. In response, some investors may be looking to lock in bond yields as lower yields are expected in the near future.
U.S. 10-year yields ($TNX) dropped to the lowest weekly closing levels since July 2023, ending the week near 3.711%.
Yield Curve Uninverts
For the first time since 2022, the 2/10 yield curve became uninverted–meaning that the 10-year yield (last week’s settlement of 3.711%) was higher than its 2-year counterpart (last week’s settlement of 3.681%).
The 2/10 yield curve had been inverted since 2022, where yields for short-term treasuries were higher than longer-term counterparts as the Fed raised rates. The outlook has changed, and we do not know if the yield curve normalization will continue nor what the implications will be.
Using history as an indicator, an economic slowdown could follow. We’ll see what this week brings.
The Week Ahead
It should be an interesting week, as traders will be handicapping the odds of a 25 vs 50 bp rate cut. Should inflation dip to 2.6% annually, it may signal that the Fed’s job is nearing its completion in the battle to lower inflation to its target of 2.0%. If inflation runs higher than expected, it could indicate that a larger-than-25 bp cut could be needed.
On Wednesday, we will get a fresh pulse on consumer inflation via CPI (Consumer Price Index) data. Last month showed a taming of inflation–and the market expects further taming.
Rounding out this week, we will get PPI data on Thursday, which will provide glimpses into inflation on the producer side and unemployment claims data.
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