Wall Street reached new records, but the euphoria ran out as a disappointing US jobs report was released, fuelling expectations that the Federal Reserve will cut key interest rates at its next meeting in September.
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Investors are hoping that the US job market has slowed by just the right amount to trigger a rate cut from the Federal Reserve in two weeks time. A move which could boost the economy, but not so much that it brings a recession.
Leading stock indexes on Wall Street quickly gave up their early gains on Friday, after the report from the US Labor Department said employers across the country hired far fewer workers in August than economists expected.
The leading US stock indexes were all in losses, after 6pm in Europe, S&P was down more than 0.4%, Dow Jones lost nearly 0.5% and the technological Nasdaq dipped by 0.17%
Gold, one of the safe-haven investments, was up by more than 1.2% at this time at $3,651 an ounce.
The US dollar lost against the euro, setting the rate at around 1.1757.
European indexes also changed course and closed in the negative territory. London's FTSE 100 was down by nearly 0.1%, the Paris CAC 40 lost more than to 0.3%, and Frankfurt's DAX lost more than 0.7%.
US job market slows
Total nonfarm payroll (NFP)—the name for the monthly report from the US Bureau of Labor Statistics measuring the change in number of people in employment—shows August saw an increase of just 22,000, down markedly from a revised 79,000 in July and far below estimates. Meanwhile, the unemployment rate rose slightly to 4.3%.
The US government also said that earlier estimates for June and July overstated hiring by 21,000 jobs. Bond yields tumbled as investors reacted to the report.
The disappointing numbers followed last month's weaker-than-expected update, along with other lacklustre reports in the intervening weeks, and traders now are betting on a 100% probability that the Fed will cut its main interest rate at its next meeting on 17 September, according to data from CME Group.
“Markets have been pricing in a 0.25% rate cut at the Federal Reserve’s upcoming monetary policy meeting, and today’s softer-than-expected jobs number may well grant that wish," Richard Carter, head of fixed interest research at Quilter Cheviot said in a comment.
Such cuts can give a kickstart to the economy and job market, but the Fed has held off on them so far this year because they can also give inflation more fuel.
"Still, one major obstacle remains. Inflation continues to complicate the Fed's path, and next week’s CPI (consumer price index) print will be critical," Carter said, adding that US trade tariffs could result in higher inflation and "lead to a split decision later this month.”
Until now, the Fed has been more worried about the potential of inflation worsening because of President Donald Trump's tariffs than about the job market. But Friday's job numbers were weak enough that they could even push the Fed to consider cutting by a deeper-than-usual amount in two weeks, said Brian Jacobsen, chief economist at Annex Wealth Management.
"This week has been a story of a slowing labour market, and today's data was the exclamation point," according to Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management.
While the data on the job market is disappointing, it's still not so weak that it's screaming a recession is here. The hope for investors is that the job market can remain in a balance where it's not so strong that it prevents cuts to interest rates, but also not so weak that the economy goes into a ditch.
Stocks have run to records recently, in part because of already high expectations for upcoming rate cuts.
