- Disappointing US jobs data push dollar off the cliff
- Yen extends rally as fears over US economy mount
- Stocks drop, VIX rallies to levels seen more than a year ago
NFP Report Disappoints, Rate Cut Bets Surge
The US dollar plunged on Friday after the US employment report for July came in weaker than expected, raising fears about the performance of the US economy and prompting market participants to start believing that the Fed may need to cut interest rates by 50bps at the upcoming meeting in September.
Nonfarm payrolls increased by only 114k, missing the forecast of 175k, while the unemployment rate rose to 4.3%, confounding expectations for an unchanged rate of 4.1%. Wages were also weaker than expected, with the y/y rate sliding to 3.6% from 3.8%.
Apart from nearly fully pricing in a double rate cut in September, investors are now seeing around 127bps worth of easing by December, as the weak data triggered what is known as the “Sahm Rule”.
This rule indicates that a recession is already underway when the three-month moving average of the national unemployment rate rises half a percentage point above its low from the previous 12 months. That level was breached with the July data on Friday.
Today, traders may turn their attention to the ISM non-manufacturing PMI for July for more signs of how the economy entered the second quarter.
The forecast points to a rebound back above the equilibrium 50 zone, which could calm investors’ nerves and serve as a message that 127bps worth of reductions this year is probably an unrealistic scenario.
The dollar may experience a relief bounce as traders remove some basis points worth of reductions, but should this data disappoint as well, the greenback’s free fall is likely to continue.
Yen Skyrockets as US-Japan Yield Spread Narrows
The yen was the main winner, gaining nearly 2% on Friday and extending its rally by another 2% already today. The risk-linked currencies were the ones that gained the least against the US dollar.
This indicates that the yen has reclaimed its safe-haven status, stealing some shine from gold, which failed to match its record high on Friday and is correcting lower today, despite the initial spike north due to the dollar’s slide.
Following the intervention episode by Japanese authorities on July 11, investors may have decided to unwind profitable carry trades as risk appetite began to deteriorate, with the bigger-than-expected rate hike by the BoJ adding an extra boost.
This, combined with the overly dovish repricing of the market on Friday and thereby the drop in Treasury yields, significantly widens the yield differentials between the US and Japan and adds fuel to the yen’s engines.
Wall Street Drip, Nasdaq Confirms Correction
All of Wall Street’s main indices dropped by more than 1.5% on Friday, with the tech-heavy Nasdaq tumbling more than 2.5%.
This suggests that we are back in an environment where bad news is actually bad, and it is not cheered by the stock market anymore due to increasing expectations of lower borrowing costs.
Market participants are now concerned that the Fed may have already waited too long to start easing monetary policy, and the fear is evident by the sharp spike in the VIX index to levels last seen more than a year ago.
The Nasdaq is already down more than 10% from its record high, hit on July 11, confirming that it is in a correction, as concerns about high valuations in a weakening economy grew.
Having said all that though, the latest market moves may be overstretched considering that they are the result of one data set.
Therefore, with the first sign that the US economy is holding better than feared, some market participants may see an opportunity to buy stocks at cheaper prices.