US Payrolls: Massive downside surprise leads to calls for 50bp rate cut

The slowdown in the US labor market was confirmed today, when the NFP report reported that only 22k jobs were created last month. August is typically a slow month for payrolls; however, this was much worse than expected.

The job declines were led by the manufacturing, mining, construction, and professional and business services sectors. There was also a decline in government jobs last month. The fact that the job losses were broad-based is leading to fears of a slowdown.

While the US economy has been shedding jobs in certain sectors for some time, for example, the manufacturing sector, now there is a sign that the other sectors of the economy cannot make up for this by hiring more. The broad nature of the slowdown is likely to lead to concerns about the state of the economy, it could also lead to the ire of Donald Trump and even more pressure on the Fed to cut rates.

In the aftermath of this report and the ugly payrolls number, the Fed Fund Futures market is now pricing in more than 25bp rate cut for this month, and calls are likely to grow for a 50bp cut in September. US Treasury yields are sharply lower, the 2-year yield is down 9 bps after the report, and this is causing global bond yields to fall. After all, if the US sneezes, the rest of the world catches a cold. We just don’t know yet why the US economy is sneezing: is it allergies caused by tariff policy uncertainty or is it something worse?

The report has had a big market impact, the dollar is lower, and the dollar index fell below 98.00 after the report. US equity futures are whipsawing. Last month stocks received a boost from a weak payrolls number and a rapid dovish repricing of US interest rates. The market is currently repricing September’s cut to 50bps, but we doubt the market will start to price in more than the current 6 cuts between now and Jan 2027.

Thus, as concerns about the economy grow, we could see stocks struggle. Small and mid-cap stocks and cyclical sectors like consumer discretionary stocks are likely to struggle first, if we see tech stocks struggle then expect bigger declines for the S&P 500, as the Magnificent 7 and the likes of Broadcom have powered the S&P 500 to fresh record highs in recent weeks, could be on the cards.  However, a 50bp rate cut from the Fed later this month could cushion some of the blow for stocks and would provide a positive catalyst for an economy that is clearly weakening.

The gold price is also surging and has made a fresh record high on the back of the weak payroll number. Upward momentum in the gold price is huge right now, and a break of the $3,600 level could be on the cards on the back of this report. A weakening labour market combined with relatively high inflation is leading to stagflation fears, and gold is the ultimate inflation hedge in this environment.

Overall, this payrolls report leads to lots of questions about the actual strength of the US economy and what is driving the rapid slowdown in hiring. It could also lead to more thematic questions like the future of the AI trade, which has been so pivotal to tech stocks and to the entire US stock market ecosystem in recent years. If the economy is weakening, then who will buy or invest in the AI products?

Thus, it could be a volatile few days for financial markets, as this report sets the scene for a mega rate cut from the Fed on 17^th September.