The August private employment report sent shockwaves through the markets on Thursday, triggering a flurry of activity in interest rate-sensitive assets and fueling speculation about a significant rate cut by the Federal Reserve.
The ADP National Employment report revealed that U.S. private employers added only 99,000 jobs in August, the lowest figure since January 2021 and a significant decline from the revised 111,000 jobs added in July. This outcome fell short of analysts’ expectations of 140,000 jobs, indicating a surprising cooling in labor market conditions last month.
The report adds to a growing list of indicators pointing to a weakening labor market. The Challenger Job Report, released earlier in the week, showed a sharp increase in job cuts, with 75,891 jobs eliminated in August – a 193% jump from the 25,885 cuts recorded in July. Additionally, official statistics released the day before showed that job openings fell to 7.673 million in July, the lowest level in over three years, with vacancies now almost matching the level of unemployment.
The market’s reaction to this string of disappointing labor market data was immediate and decisive. Traders have dramatically increased their bets on a 50-basis-point rate cut by the Fed this month, with market-implied probabilities for such a cut surging to 45% according to the CME Group’s FedWatch tool.
Treasury yields, which are sensitive to interest rate changes, moved lower across the board. The policy-sensitive two-year yield dropped by 3 basis points to 3.72%, reaching its lowest level in a month. The benchmark 10-year yield also declined, falling to 3.73%, its lowest level in a month, and officially surpassing the two-year yield for the first time since July 2022, marking the end of the U.S. yield curve inversion.
In premarket trading, the iShares 20+ Year Treasury Bond ETF (TLT) was up 0.3% at 9:00 a.m. in New York, after closing 1.3% higher on Wednesday.
The Japanese yen strengthened against the dollar, benefiting from the narrowing yield differentials between the two regions. The Invesco CurrencyShares Japanese Yen Trust (FXY) was 0.4% higher.
Gold prices, another safe-haven asset, rallied on the back of the disappointing employment data, surging to $2,515 per ounce. The SPDR Gold Trust ETF (GLD) was up by 0.9%.
While U.S. major indices were set to open slightly lower, with S&P 500 futures down 0.1% and Nasdaq 100 futures slipping 0.3%, sector performance varied. Technology stocks, as tracked by the Technology Select Sector SPDR Fund (XLK), lagged, down 0.6%, while Utilities, tracked by the Utilities Select Sector SPDR Fund (XLU), saw the most strength, up 0.7%.
The focus now shifts to the official jobs report, due to be released on Friday, which could provide further insight into the state of the labor market and potentially influence the Fed’s decision on interest rates in the coming weeks.
