Monday Jump Start podcast: Navigating markets after US rerating and jobs report (4:22)
CIO’s Kiran Ganesh shares our take on bonds after Fitch's US credit rating downgrade and discusses what the nonfarm payrolls report means for the US economy.

Thought of the day

The US economy generated a net 187,000 jobs in July, slightly less than the consensus forecast for 200,000. As a result, the three-month moving average declined to 218,000, the lowest since January 2021, including downward revisions to the prior two months.

The initial market reaction appeared consistent with the view that the release made further tightening by the Federal Reserve less likely. While fed funds futures were little changed on Friday, the yield on the 2-year Treasury fell along with the DXY dollar index, which tracks the US dollar against six major peers. S&P 500 futures pointed to a positive start to the week, after a 2.3% decline in the index last week, the worst performance since March when the collapse of Silicon Valley Bank sparked worries over the US banking system.

Our base case remains that the Fed’s 25-basis-point hike in July will probably be the last in the cycle—as inflation continues to cool and growth softens in response to 525bps of rate rises since March 2022, the fastest tightening cycle since the 1980s. In our view, the recent jobs data is more or less in agreement with anecdotal evidence that a softening in the labor market is under way.

But elements of resilience in the jobs market mean that investors cannot yet take an end to rate hikes for granted:

Continued strong demand for workers was underlined by JOLTS data for June. While job openings fell slightly to 9.58 million in the month, that was far above the 5.84 million unemployed workers pointed to by Friday's nonfarm payroll report.

Unemployment remains at multi-decade lows. Fed Chair Jerome Powell has said he is encouraged by the fact that rate rises have so far not resulted in a spike in unemployment. Low unemployment improves the chances of an economic soft landing, reducing the risk that consumers will cut back spending in fear of losing their jobs. However, the decline to 3.5% in July from 3.6% in June leaves the jobless rate only a 0.1 percentage point above the 3.4% struck in May—which matched the lowest level since 1969. It is also well below the Fed’s latest median estimate of 4.1% by the fourth quarter of this year.

The Fed will also be looking for more convincing evidence of slowing wage growth. The annual growth in average hourly earnings has not trended lower so far in 2023—ranging between 4.2% and 4.6%. In July, average hourly earnings increased by 4.4%, the same pace as in the first month of the year. Other measures of compensation growth, however, have slowed, including the three-month moving average of the Atlanta Fed’s wage tracker, which is down from a peak of 6.7% in August to 5.6% in June. But this has yet to fall to a level that is consistent with the Fed’s 2% inflation target.

So, in our view, the labor market picture remains mixed. While the data does not support a rate hike from the Fed’s next policy meeting on 20 September, the central bank will likely want to see further softening. Attention now shifts to this week’s consumer price index (CPI) release for July. The Fed will still have to digest another monthly jobs report and another inflation report after this week’s CPI release. Against this uncertain backdrop and with rate cuts still a distant prospect, in our view, we expect a challenging outlook for US stocks and advise investors to focus on parts of the market that have lagged.