Grim U.S. Job Numbers Roil Markets

Traders are sounding recession alarms as tough July jobs numbers have plenty questioning the Fed's rates strategy.

What’s the Scoop?

• BOJ Raise: Late Tuesday evening, the Bank of Japan raised its anemic short-term interest rate target from 0.1% to 0.25% in order to combat yen destabilization and domestic inflation, placing immense pressure on carry traders by squeezing net interest margins and yen shorts.
• Fed Pause: While signs of U.S. economic weakness have become increasingly evident in recent weeks, demonstrated by falling employment and cooling inflation, America’s Federal Reserve chose to hold its benchmark fed funds policy rate at 5.5% on Wednesday, potentially to avoid further squeezing the already-volatile yen carry trade. Fed Chair Jerome Powell admitted that only “material further cooling in the labor market” indicating a significant downturn in employment would catalyze rate cut action.
• Labor Weakness: U.S. employment statistics released today for the month of July showed that non-farm payrolls increased by 114k, well below analyst forecasts for 175k jobs gained, meanwhile, the unemployment rate increased by 20 bps to 4.3%, officially triggering the Sahm rule, a lagging indicator that has accurately predicted every recession since 1950 with only one false positive.

Bankless Take:

Given that the Federal Reserve already decided to hold short-term interest rates constant, that today’s employment miss is likely not drastic enough to incite emergency cuts, and that their eventual arrival threatens to further squeeze global carry trades, market participants have found themselves gripped with panic today: traders are rushing into safe and liquid U.S. Treasuries, yen is skyrocketing, and VIX has gone parabolic.

While talking head pundits see no need for fear, signals of the economic and market variety are all indicating that immense caution is warranted at this stage.