Global assets stage a battle royale! Has the last dominoes of the United States economy fallen?

The latest non-farm payrolls report became the trigger for a new round of sell-off.

Weak jobs data added to fears of a slowdown in the United States, and European and U.S. stock markets opened lower on Friday amid recession clouds. At the same time, the outlook for the AI industry has been tested again by the negative earnings reports of Amazon and Intel, and the continued turmoil in heavyweights has exacerbated the panic and liquidity in the market, and risk aversion remains high.

Non-farm payrolls ring the countdown to recession?

The latest report from the United States Department of Labor said that 114,000 new jobs were created in United States in July, a new low for the year, while wage growth fell to 3.6%, a new low in nearly three years.

With cracks in the labor market, the last dominoes of the United States economy may be falling. Before that, the United States job market continued to be hot even with volatile economic data. However, since the second quarter, the United States non-farm payrolls report has shown a clear cooling trend, gradually matching with the private survey, and the unemployment rate has been rising.

It is worth mentioning that with the unemployment rate rising to 4.3% from 4.1% previously, this has triggered the "Sam rule" that heralds a recession. The Sam rule refers to the fact that when the 3-month average of the unemployment rate is 0.5 percentage points above the 12-month low, it usually means that the economy is already in a recession. In all 11 United States recessions since 1950, this rule has been confirmed.

In fact, the United States economy seems to be facing significant headwinds at the start of the second half of the year. Against the backdrop of the sluggish local Fed manufacturing index, the July ISM manufacturing index released this week fell to an eight-month low of 46.8%, suggesting that the national manufacturing sector is contracting further.

Behind the downturn in manufacturing may be the sluggishness in consumer demand and confidence. The latest consumer sentiment index released by the University of Michigan remains at a low level this year, and the Federal Reserve's Beige Book also shows that contacts believe that GDP growth will be tested for the rest of the year.

The Federal Reserve kept rates unchanged at this week's interest rate meeting, but opened the door for a rate cut in September. Fed Chair Jerome Powell also spoke about the labor market at the time, saying he was wary of possible signs of large volatility. Therefore, the latest data will undoubtedly be a wake-up call for the FOMC. Fed funds rate futures show that the probability of a 50 basis point rate cut in September has risen by 80%, and the room for a rate cut for the whole year has reached more than 110 basis points.

Boris Schlossberg, a macro strategist at asset management agency BK Asset Management, said in an interview with Yicai that the question now may not be whether the Fed will cut interest rates in September, but whether it will cut interest rates by more than 25 basis points. What can be seen is that the talk of recession and the criticism of the Fed will grow louder.

Wall Street institutions have quickly adjusted their judgment on the Fed's monetary policy. Goldman Sachs now expects the Fed to cut interest rates three times in a row this year. If the August non-farm payrolls report is also weak, then a 50bp rate cut is likely.

Citi believes the Fed will cut rates by 50 basis points at its September and November meetings, and by 25 basis points at its December meetings, after the bank had expected the Fed to cut rates by 25 basis points at each of the three meetings. JPMorgan Chase & Co. economist Michael Feroli also predicted a 50 basis point rate cut in September and November, but he wrote that Fed Chair Jerome Powell may not want to bring uncertainty to the market.

Risk Asset Battle Royale

A new round of losses in U.S. stocks has been underway since Thursday. Technology stocks with higher valuations have been hit hard, with money rushing to defensive sectors. Angelo Kourkafas, senior investment strategist at Edward Jones, said: "It has always been believed that rate cuts are only because inflation is close to target, while everything else remains fairly solid. But now some cracks have appeared. ”

After Tesla and Google last week, Intel and Amazon fell victim to another batch of negative earnings reports. Intel plunged nearly one-quarter on Friday, the company's second-quarter performance was well below market expectations, and the third-quarter guidance is expected to disappoint the market, while also announcing a large layoff plan to cut more than 15% of its workforce (about 15,000) this year.

Amazon, which fell more than 10% intraday, is ramping up capital spending to invest in infrastructure and development of artificial intelligence, spending about $16.5 billion in the second quarter, in addition to slowing growth in online sales of its main business, like other big tech companies. Google's parent company, Alphabet, and Microsoft both said last month that spending would remain high throughout the year to support the development of expensive AI software and services. Investors see this as a signal that the return on this popular technology may take longer than initially anticipated.

As the results of the tech giants are announced, the high expectations have dampened investors' enthusiasm. The broader market is also showing signs of unease. The Chicago Board Options Exchange Volatility Index (VIX) rose more than 40% in late trading.

At the same time, investors have shown a preference for sectors such as utilities and healthcare, which are popular choices during times of economic uncertainty. Over the past month, the healthcare sector has grown by 4%, while utilities have grown by more than 9%. In contrast, the Philadelphia Semiconductor Index fell 11% over the same period, with popular companies such as Nvidia and Broadcom falling sharply.

In the foreign exchange market, the yen rose 1.7% against the dollar, approaching the 146 mark, and has appreciated by more than 6% this week, with safe-haven flows further exacerbating the yen's rise. Meanwhile, the Switzerland franc was also buoyed by risk aversion, with the CHF/USD rising to a nearly seven-month high of 0.856. In addition, the gains of EUR/USD and RMB/USD also exceeded the decline of the dollar index on the day.

In terms of commodities, gold briefly surged to $2,510 an ounce after the release of the non-farm payrolls data, hitting another all-time high. At the same time, recession fears hit crude oil again, with international oil prices tumbling more than 3% in late trading, completely eradicating the risk premium from fears of escalation in the Middle East earlier this week. Phil Flynn, senior market analyst at Price Futures Group, believes demand concerns have regained dominance after a series of disappointing United States data triggered a sell-off in crude oil and other assets, including equities, amid fears that the world's largest economy may be slipping into recession.

(This article is from Yicai)