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The Fed has cut rates amid stock swoons before. Not this time.

A sharp slowdown in the US job market that touched off days of global stock-market turmoil also fueled speculation the Federal Reserve may not wait until its next scheduled meeting, in September, to cut interest rates.Indeed, an interest rate futures contract expiring later this month that tracks Fed policy expectations shot to a two-month high earlier in the week in a bet that rates would be lower by the end of August.The odds are against it. As Chicago Fed President Austan Goolsbee said earlier this week, “the law doesn’t say anything about the stock market. It’s about employment and it’s about price stability,” referring to the Fed’s double mandate to foster full employment and price stability.An increasing number of analysts are now penciling in a half-a-percentage-point rate cut for the Fed’s September meeting. But few if any believe the Fed will move sooner.”Current economic data do not warrant an emergency intermeeting rate cut, and this would only ignite a new round of panic into the markets,” wrote Nationwide economist Kathy Bostjancic.Even former New York Fed President Bill Dudley, who called for the US central bank to cut rates last week even before the latest data showed the unemployment rate jumped to 4.3% in June, wrote this week that an intermeeting cut is “very unlikely.”In late August Fed Chair Jerome Powell is expected to have a chance to give a fresh steer on what he thinks could be needed when global central bankers gather at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming.For now Powell is widely anticipated to look past the stock-market swoon and stick to what he said last Wednesday, after the Fed’s decision to leave the policy rate in the 5.25%-5.50% range.”If we do get the data that we hope we get, then a reduction in our policy rate could be on the table at the September meeting,” he said.In the weeks ahead, data on jobs, inflation, consumer spending and economic growth could all influence whether that reduction would be a quarter-point cut or something bigger.On each of the eight occasions over the past 30 years that the US central bank has cut rates between policy-setting meetings, the upheaval in markets went well beyond equities. In particular, bond market indications of rapidly building disruptions to the credit flows that keep businesses humming were in plain view, a factor notably absent so far.A spin through each of them shows why those times were different.Oct. 15, 1998 – The Fed, which had only just delivered a quarter-point rate cut at its meeting two weeks earlier, cut the policy rate another 25 basis points. The failure of hedge fund Long-Term Capital Management – on the heels of Russia’s sovereign debt default two months earlier – was reverberating through US financial markets, blowing out credit spreads that threatened to impact investment and drag down the economy.Jan. 3 and April 18, 2001 – The Fed delivered two surprise half-point interest rate cuts early in the year after the sharp upswing in dot-com tech stocks turned into an equity rout that policymakers worried would pinch household and business spending. What had been mostly a stock market event bled into the corporate bond market through late 2000, sending high-yield credit spreads to their widest on record to that point.The two Fed cuts were in addition to two half-point cuts at its Jan. 31 and March 20 meetings.Sept. 17, 2001 – The Fed cut the policy rate by half a percentage point following the attacks and the days-long closure of US financial markets, and promised to continue to supply unusually large volumes of liquidity to the financial markets until more normal market functioning was restored. High-yield bond spreads widened more than 200 basis points before the Fed’s actions helped restore calm in credit markets.Jan. 22 and Oct. 8, 2008 – The Fed cut its policy rate by 75 basis points at an unscheduled meeting in January as what had begun as a crisis in subprime lending the prior summer gathered steam and spread to global markets. High-yield spreads stood at their widest in five years at the time.Then, Lehman Brothers’ failure on Sept. 15 ushered in a new phase of the crisis, and though the Fed skipped policy action at its meeting a day later, by early October it got together with other global central bankers for a coordinated action that included a half-point cut to the federal funds rate. Credit spreads eventually peaked near year end at what is still a record for both high-yield and investment-grade bonds.March 3 and March 15, 2020 – The Fed cut rates by half a percentage point, and then less than two weeks later by another full point, to ease policy as global travel and commerce suddenly skidded to a near standstill in the face of government shutdowns to prevent the spread of COVID-19. While US stock indexes dropped more than 30%, of even greater concern was a 700-point widening of credit spreads and disruptions to the function of the US Treasury market.(Reporting by Ann Saphir and Dan Burns; Editing by Andrea Ricci) Continue reading

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A ‘soft landing’ is still on the table, economists say

A weaker-than-expected jobs report on Friday fueled fears of a U.S. recession.
An increase in the national unemployment rate triggered the “Sahm rule” in July, suggesting the U.S. is in a downturn.
While there are causes for concern, data suggest the overall economy remains resilient, economists said.

Traders on the floor of the New York Stock Exchange during afternoon trading on Aug. 02, 2024.
Michael M. Santiago | Getty Images

Recession fears led to a sharp stock-market selloff in recent days, with the S&P 500 index posting a 3% loss Monday, its worst in almost two years.
Weaker-than-expected job data on Friday fueled concerns that the U.S. economy is on shaky footing, and that the Federal Reserve may have erred in its goal of achieving a so-called “soft landing.”

A soft landing would mean the Fed charted a path with its interest-rate policy that tamed inflation without triggering an economic downturn.
Federal data on Friday showed a sharp jump in the U.S. unemployment rate. Investors worried this signaled a “hard landing” was becoming more likely.
However, the odds of a recession starting within the next year are still relatively low, economists said.
In other words, a soft landing is still in the cards, they said.

“I think far and away the most likely scenario is a soft landing: The economy avoids an economic downturn,” said Mark Zandi, chief economist at Moody’s.

Likewise, Jay Bryson, chief economist at Wells Fargo Economics, said a soft landing remains his “base case” forecast.
But recession worries aren’t totally unfounded due to some signs of economic weakness, he said.
“I think the fears are real,” he said. “I wouldn’t discount them.”
Avoiding recession would also require the Fed to soon start cutting interest rates, Zandi and Bryson said.
If borrowing costs remain high, it increases the danger of a recession, they said.

Why are people freaking out?

The “big shock” on Friday — and a root cause of the ensuing stock-market rout — came from the monthly jobs report issued by the Bureau of Labor Statistics, Bryson said.
The unemployment rate rose to 4.3% in July, up from 4.1% in June and 3.5% a year earlier, it showed.
A 4.3% national jobless rate is low by historical standards, economists said.

But its steady increase in the past year triggered the so-called “Sahm rule.” If history is a guide, that would suggest the U.S. economy is already in a recession.
The Sahm rule is triggered when the three-month moving average of the U.S. unemployment rate is half a percentage point (or more) above its low over the prior 12 months.
That threshold was breached in July, when the Sahm rule recession indicator hit 0.53 points.

Goldman Sachs raised its recession forecast over the weekend to 25% from 15%. (Downturns occur every six to seven years, on average, putting the annual odds around 15%, economists said.)
Zandi estimates the chances of a recession starting over the next year at about 1 in 3, roughly double the historical norm. Bryson puts the probability at about 30% to 40%.

The Sahm rule may not be accurate this time

However, there’s good reason to think the Sahm rule isn’t an accurate recession indicator in the current economic cycle, Zandi said.
This is due to how the unemployment rate is calculated: The unemployment rate is a share of unemployed people as a percent of the labor force. So, changes in two variables — the number of unemployed and the size of the labor force — can move it up or down.
More from Personal Finance:’Don’t panic’ amid stock market volatilityThis labor data trend is a ‘warning sign,’ economist saysNow is the time to buy stocks ‘on sale’
The Sahm rule has historically been triggered by a weakening demand for workers. Businesses laid off employees, and the ranks of unemployed people swelled.
However, the unemployment rate’s rise over the past year is largely for “good reasons” — specifically, a big increase in labor supply, Bryson said.

More Americans entered the job market and looked for work. Those who are on the sidelines and looking for work are officially counted amid the ranks of “unemployed” in federal data, thereby boosting the unemployment rate.
The labor force grew by 420,000 people in July relative to June — a “pretty big” number, Bryson said.
Meanwhile, some federal data suggest businesses are holding on to workers:  The layoff rate was 0.9% in June, tied for the lowest on record dating to 2000, for example.

‘The flags are turning red’

That said, there have been worrying signs of broader cooling in the labor market, economists said.
For example, hiring has slowed below its pre-pandemic baseline, as have the share of workers quitting for new gigs. Claims for unemployment benefits have gradually increased. The unemployment rate is at its highest level since the fall of 2021.

“The labor market is in a perilous spot,” Nick Bunker, economic research director for North America at job site Indeed, wrote in a memo Friday.
“Yellow flags had started to pop up in the labor market data over the past few months, but now the flags are turning red,” he added.

Other positive signs

There are some positive indicators that counter the negatives and suggest the economy remains resilient, however.
For example, “real” consumer spending (i.e., spending after accounting for inflation) remains strong “across the board,” Zandi said.
That’s important since consumer spending accounts for about two-thirds of the U.S. economy. If consumers keep spending, the economy will “be just fine,” Zandi said.

I think far and away the most likely scenario is a soft landing: The economy avoids an economic downturn.

Mark Zandi
chief economist at Moody’s

Underlying fundamentals in the economy like the financial health of households are “still pretty good” in aggregate, Bryson said.
It’s also a near certainty the Fed will start cutting interest rates in September, taking some pressure off households, especially lower earners, economists said.
“This is not September 2008, by any stretch of the imagination, where it was ‘jump into a fox hole as fast as you can,'” Bryson said. “Nor is it March 2020 when the economy was shutting down.”
“But there are some signs the economy is starting to weaken here,” he added. Continue reading

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Sahm rule creator doesn’t think that the Fed needs an emergency rate cut

Sahm was the economist who introduced the so-called Sahm rule in 2019.
It states that the initial phase of a recession has started when the three-month moving average of the U.S. unemployment rate is at least half a percentage point higher than the 12-month low.

The U.S. Federal Reserve does not need to make an emergency rate cut, despite recent weaker-than-expected economic data, according to Claudia Sahm, chief economist at New Century Advisors.
Speaking to CNBC “Street Signs Asia,” Sahm said “we don’t need an emergency cut, from what we know right now, I don’t think that there’s everything that will make that necessary.”

She said, however, there is a good case for a 50-basis-point cut, adding that the Fed needs to “back off” its restrictive monetary policy.
While the Fed is intentionally putting downward pressure on the U.S. economy using interest rates, Sahm warned the central bank needs to be watchful and not wait too long before cutting rates, as interest rate changes take a long time to work through the economy.
“The best case is they start easing gradually, ahead of time. So what I talk about is the risk [of a recession], and I still feel very strongly that this risk is there,” she said.
Sahm was the economist who introduced the so-called Sahm rule, which states that the initial phase of a recession has started when the three-month moving average of the U.S. unemployment rate is at least half a percentage point higher than the 12-month low.
Lower-than-expected manufacturing numbers, as well as higher-than-forecast unemployment fueled recession fears and sparked a rout in global markets early this week.

The U.S. employment rate stood at 4.3% in July, which crosses the 0.5-percentage-point threshold. The indicator is widely recognized for its simplicity and ability to quickly reflect the onset of a recession, and has never failed to indicate a recession in cases stretching back to 1953.
When asked if the U.S. economy is in a recession, Sahm said no, although she added that there is “no guarantee” of where the economy will go next. Should further weakening occur, then it could be pushed into a recession.
“We need to see the labor market stabilize. We need to see growth level out. The weakening is a real problem, particularly if what July showed us holds up, that that pace worsens.” Continue reading

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Kentucky Governor Plans to Collect Sales Tax on Gold and Silver Despite New Law

Kentucky Governor Andy Beshear has decided he’s going to continue collecting sales tax on the sale of gold and silver despite a new law repealing the levy and an attorney general opinion calling his line-item veto of the provision unconstitutional.

Only five other states levy a sales tax on gold and silver.

Initially, Rep. Steven Doan and Rep. John Hodgson introduced a standalone bill to repeal the sales and use tax on gold and silver bullion. The provisions were later inserted into House Bill 8 (HB8), an omnibus revenue and tax bill.

The provisions in HB8 define “bullion” as “bars, ingots, or coins, which are made of gold, silver, platinum, palladium, or a combination of these metals, valued based on the content of the metal and not its form and used, or have been used, as a medium of exchange, security, or commodity by any state, the United States government, or a foreign nation.” Currency is defined as “a coin or currency made of gold, silver, platinum, palladium, or other metal or paper money that is or has been used as legal tender and is sold based on its value as a collectible item rather than the value as a medium of exchange.”

The House passed the bill 87-9 and the Senate approved the measure 34-0.

Gov. Beshear signed the bill but used a line-item veto to strike out the sales tax exemption for gold and silver.

“If you own gold, you can afford to pay sales tax,” Beshear wrote in his veto message. “Tangible goods are the primary basis of the sales tax.”

Unconstitutional Veto

House and Senate leadership deemed the veto unconstitutional. Under Sec. 88 of the Kentucky Constitution, “The Governor shall have the power to disapprove any part or parts of appropriation bills embracing distinct items, and the part or parts disapproved shall not become a law unless reconsidered and passed, as in case of a bill.”

In other words, the governor only has line-item veto power on appropriation (spending) bills.  A line-item veto power does not exist for revenue bills.

Instead of simply overriding the veto, Republican leadership decided to make a political statement and try to give Beshear a black eye. It asked Attorney General Russell Coleman to issue an opinion on the constitutionality of the veto, and he agreed with the legislature’s assessment.

“Because the Governor’s veto power must be strictly construed, and because House Bill 8 is not an ‘appropriation bill,’ Section 88 does not empower the Governor to use his line-item veto on it. The Governor’s attempted line-item vetoes of House Bill 8 were nullities, as they exceeded his constitutional authority.”

Based on the AG’s opinion, the legislature directed the secretary of state to ignore the veto and enroll the statute. It went into effect on August 1.

Beshear Begs to Differ

Gov. Beshear rejected the AG’s opinion and has directed the Department of Revenue to collect the sales tax despite the law technically being on the books.

Beshear spokesman James Hatchett called the AG’s opinion “incorrect.”

“The very title of the bill at issue says it makes an appropriation. The governor properly exercised his constitutional authority to veto parts of the bill, and previous legal opinions have upheld similar line-item vetoes.”

Hatchett was referring to the first line of HB8:  “AN ACT relating to fiscal matters, making an appropriation therefor, and declaring an emergency.” [Emphasis added]

The National Coin and Bullion Association issued a statement highlighting the dilemma for gold and silver sellers and buyers in Kentucky.

“Retailers are now faced with a challenging decision. Collecting sales tax could result in consumer backlash and potential class action lawsuits for overcharging, while not collecting it might lead to penalties or interest from the Kentucky Department of Revenue. Given the rapidly evolving situation, each dealer must decide whether to charge sales tax on transactions involving bullion and currency starting August 1.”

Until there is a legal resolution, which will likely require a lawsuit, Money Metals plans to charge sales tax to Kentucky customers.

Here is the official position from Money Metals:

“Despite the new tax exemption in state law, the Democrat Kentucky governor and his Department of Revenue are threatening dealers and citizens with legal action if they refuse to pay/remit sales taxes on gold and silver purchases. However, you can avoid taxes if your order is delivered to a state without sales taxes OR when you store your precious metals in your secure account at the >Idaho-based Money Metals Depository.” Continue reading

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Stocks still have the same problem after a wild Monday in markets: Yahoo! Finance Morning Brief

This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:Stocks finished last week under pressure.They began this week in the same state.When the closing bell rang on Wall Street on Monday, the Nasdaq (^IXIC) had shed 3.4%, deepening losses after tumbling into a correction last week.The benchmark S&P 500 (^GSPC) had lost 3%, while the Dow (^DJI) fell 1,034 points.The stars of the stock market show this year — the Magnificent Seven — lost some $652 billion in market capitalization on Monday alone.Overnight carnage in Asian markets that sent US stock futures off as much as 6% in the predawn hours on Monday created a new strain of worry about the state of yen “carry trade.”The price of cryptocurrencies captured the breadth of the risk-off move in markets, as bitcoin (BTC-USD) and ether (ETH-USD) tumbled toward some of their largest one-week losses since the collapse of FTX. And several US online brokers appeared to struggle with connectivity issues in the early going Monday as investors rushed to check their portfolios — or perhaps move in or out of positions during the early chaos.All manner of market commentators were in full flight on Monday. Some admonished those panicked about a return to prices seen just a few months ago. Others were spiking the football on an overhyped AI trade that appeared to finally be cracking under pressure.Wall Street strategists proffered all manner of explanations, ranging from the unwind of the aforementioned yen carry trade, to Vice President Kamala Harris’s better poll numbers against Donald Trump, to investors simply growing too complacent with concentration in the AI trade and low volatility. Even this weekend’s news that Warren Buffett had trimmed his holdings in Apple got some run as an explanation.But last week’s market turn had a clear catalyst: the Federal Reserve.Federal Reserve Chairman Jerome Powell takes a question from a reporter at a news conference following a Federal Open Market Committee meeting at the William McChesney Martin Jr. Federal Reserve Board Building on July 31, 2024 in Washington, D.C. (Andrew Harnik/Getty Images) (Andrew Harnik via Getty Images)And this remains the cleanest way to understand why the stock market’s year of smooth sailing has come to an abrupt end. When the Fed held interest rates steady last week, investor reactions suggested the central bank had made a policy mistake by not taking the chance to lower rates before the economy showed signs of weakness.A soft July jobs report heightened worries that rather than lowering rates from a position of strength (having tamed inflation without harming the labor market), the Fed would end up cutting from a position of need with the labor market quickly softening.In a press conference last week, Fed Chair Jay Powell repeated the recent slowdown in hiring and uptick in unemployment is a “normalization” of the labor market. Investors appear less convinced.So, with more than six weeks between now and the Fed’s next regularly scheduled policy meeting, markets have been quick to put pressure on the central bank not to miss its next appointment.Talk has quickly shifted from whether the Fed should cut rates on Sept. 18 to by how much the Fed should cut. (50 basis points is the current market expectation.)Some even suggested Monday the Fed might consider cutting interest rates between its scheduled meetings, a move last made during the throes of the pandemic in March 2020.A 15% drop in the Nasdaq would seem to bring with it less urgency. But one can never be too sure.Click here for the latest stock market news and in-depth analysis, including events that move stocksRead the latest financial and business news from Yahoo Finance Continue reading

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Stocks Bounce Back After Selloff as Bonds Retreat: Markets Wrap

(Bloomberg) — Stocks bounced back after selloff that erased about $6.5 trillion from global equity markets in the past few weeks.Most Read from BloombergEquities advanced after the worst S&P 500 rout in almost two years. Buying US shares after a slump of the scale witnessed over the past month has usually been profitable, according to Goldman Sachs Group Inc.’s. Since 1980, the US benchmark gauge has generated a median return of 6% in the three months that followed a 5% decline from a recent high.US Treasuries fell as demand for haven assets waned globally, with the market now turning to a $58 billion auction as the next test of investor appetite. Traders are also rowing back on expectations of deep cuts from the Federal Reserve. Swaps point to about 110 basis points of easing through this year, compared to as much as 150 basis points on Monday.“The Fed worries about systemic risk in financial markets, not disappointed investors,” said David Donabedian at CIBC Private Wealth US. “Thus the Fed is unlikely to change its course of action due to a stock market correction. Are we headed for a near term recession, or are markets overreacting? We believe slower growth is unfolding, not a recession.”The S&P 500 climbed 0.4%. Caterpillar Inc. said it expects its annual profit will be higher than previously projected. Uber Technologies Inc. reported better-than-expected orders in the second quarter. Yum! Brands Inc. posted weaker-than-anticipated sales.Treasury 10-year yields advanced two basis points to 3.81%. The dollar rose 0.3%.Key events this week:China trade, forex reserves, WednesdayUS consumer credit, WednesdayGermany industrial production, ThursdayUS initial jobless claims, ThursdayFed’s Thomas Barkin speaks, ThursdayChina PPI, CPI, FridaySome of the main moves in markets:StocksThe S&P 500 rose 0.4% as of 9:30 a.m. New York timeThe Nasdaq 100 rose 0.5%The Dow Jones Industrial Average fell 0.1%The Stoxx Europe 600 fell 0.4%The MSCI World Index rose 0.4%CurrenciesThe Bloomberg Dollar Spot Index rose 0.3%The euro fell 0.3% to $1.0918The British pound fell 0.7% to $1.2688The Japanese yen fell 0.1% to 144.33 per dollarCryptocurrenciesBitcoin rose 1.6% to $55,281.61Ether rose 1.1% to $2,463.31BondsThe yield on 10-year Treasuries advanced two basis points to 3.81%Germany’s 10-year yield declined five basis points to 2.14%Britain’s 10-year yield was little changed at 3.86%CommoditiesWest Texas Intermediate crude fell 0.9% to $72.29 a barrelSpot gold fell 0.7% to $2,394.21 an ounceThis story was produced with the assistance of Bloomberg Automation.–With assistance from Robert Brand and Aya Wagatsuma.Most Read from Bloomberg Businessweek©2024 Bloomberg L.P. Continue reading

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Markets give off ‘Black Monday’ vibes as stocks tank

By Amanda CooperLONDON (Reuters) – Global markets have kicked off the week in full selloff mode, with measures of volatility shooting up by the most on record in a single day, while equity futures and cryptocurrencies plummet, reviving memories of past crises.There is no lone trigger for these moves, but data on Friday that showed the U.S. economy did not generate as many jobs as expected in July has been a major catalyst.A rise in Japanese interest rates on July 31 has made bets on a cheap yen – many of which funded purchases of assets with better returns – less profitable. The unwinding of these trades has accelerated the decline across global stocks.Tokyo’s Nikkei index finished Monday with a 12% loss, the largest one-day drop since the aftermath of “Black Monday” in October 1987, when a stock market crash stripped nearly 15% off this index and 20% off the S&P 500.The excess volatility and the brutal nature of the selloff have prompted a number of comparisons with past market storms, – the 1987 Black Monday stock market crash, the global financial crisis of 2008, and the panic that the onset of COVID-19 lock-downs unleashed in 2020.A VOLATILE SITUATIONThe VIX index, which reflects changes in implied volatility on options on the S&P, is starting to signal distress. The index has shot up by 170% since Friday, set for its biggest one-day rise on record, after February 2018’s 115% gain on the back of spiking bond rates and the threat of a surge in inflation.The measure, often referred to as “Wall Street’s fear index”, did not rise that much in a day during the March 2020 COVID crisis – when it posted several 40%-plus daily jumps – or even during the depths of the global financial crisis, when it rose 35% a few days after the U.S. government stepped in to bail out Wall Street.TAKING STOCKThe S&P 500 and the Nasdaq Composite are down around 3% and 3.7% in early trading, respectively. Futures on the two indices fell between 4% and 5% before the market open. Monday’s drop marks a fairly hefty daily decline for the two indexes. The S&P has already lost 9% since hitting a record high on July 16, while the Nasdaq has shed 14% since its record high on July 11.On Oct. 19, 1987 – the Black Monday – the S&P lost 20% in a day, while the Nasdaq shed 11.5%. During the COVID crisis, the S&P lost 12% at one point, while the tech-heavy Nasdaq fell 12%.So the market is a long way from repeating what it has done during past bouts of turmoil.THE HEART OF THE MATTERThe Japanese yen is the star of the currency markets right now. Years of rock-bottom interest rates in Japan encouraged investors to borrow in it in order to fund other positions in a multi-trillion dollar bet known as “carry trades”. Now that Japanese rates are rising, many of those positions are getting closed, meaning that the cash the carry trades generated to buy other assets is now exiting those markets – the technology sector is one of the standout casualties, along with cryptocurrencies.The yen has its own thing going on, thanks in part to authorities in Tokyo stepping in to prop it up when it hit its weakest in 38 years in late July, at 161 to the dollar. It now trades around 142, having strengthened by over 7% in a week.It has also been a traditional safe-haven asset and strengthened around 7% on a weekly basis in both 2008 and in 1998, at the height of the Asian financial crisis. But the current move is likely more linked to an interest-rate play than down to risk appetite.The Swiss franc, a carry-trade funding currency and also a safe haven, has strengthened 4.2% since last Monday. But this kind of move is not uncommon in the currency.GOLD, OR SILVER LINING?Gold has come under pressure, even if it is perceived to be a safe haven. The price has risen by 16.5% so far this year and hit successive record highs. Typically, a lower U.S. rate environment favours gold, but intense volatility means it can get swept lower along with everything else.Back in 2020, gold had been down by 3% on multiple days, while during the financial crisis, it fell by more than 7% in October 2008, as failed bank Lehman Brothers finally imploded.Silver often moves in synch with gold, but lacks the same safe-haven appeal. It is down 5% on Monday, but, much like stocks and gold, this is a relatively modest decline compared with numerous double-digit down-days in 2020 and a near 16% fall in a single day in October 2008.(Reporting by Amanda Cooper; Graphics by Sumanta Sen and Kripa Jayaram; Editing by Tomasz Janowski) Continue reading

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US yields slide as traders bet on big Fed rate cuts after weak data

By Harry Robertson and Ankur Banerjee(Reuters) – U.S. Treasury yields tumbled on Monday as traders moved to price in big rate cuts from the Federal Reserve, after weak jobs data stoked worries that the U.S. economy could be heading for a recession.The two-year U.S. Treasury yield, which is sensitive to Fed rate expectations, dropped to 3.691% in European trading, its lowest since May last year. It was last down 10 basis points (bps) at 3.77%.The yield, which moves inversely to the price, plunged 53 bps last week.Friday’s nonfarm payrolls data – which showed the U.S. unemployment rate unexpectedly rose in July and jobs growth slowed – followed a slew of disappointing earnings results from major tech firms, setting off a global stock selloff and driving investors to safe haven assets.Investors are also grappling with a dramatic rally in the Japanese yen which has rocked the country’s markets, helping send the Nikkei 225 stock index down 12.4% on Monday in its biggest one-day drop since 1987. U.S. S&P 500 futures were down 2.7%.The yield on the benchmark U.S. 10-year Treasury note was down 5 bps at 3.742%, having touched a one-year low of 3.678% earlier in the session. The yield sank nearly 40 basis points last week, the largest weekly fall since March 2020.Michael Weidner, co-head of global fixed income at Lazard Asset Management, said the rally in bond markets was being amplified by investors worrying about their positions in tech stocks and by thin summer markets.”The move over the last two days in particular, that’s not as much driven by fundamentals as it is by the correction in U.S. equity markets,” he said.”We believe still that a soft landing (for the economy) is more of a base-case scenario.”Markets are now anticipating around 125 bps of U.S. rate cuts this year, up from around 90 bps on Friday and 50 bps at the start of last week.Traders now think a 50 bp cut in September is a near certainty, according to derivative market pricing.The closely watched U.S. 2-year-to-10-year yield curve narrowed its inversion, to 2 bps, the least since July 2022, reflecting expectations for a sharp easing of short-term yields.(Reporting by Harry Robertson in London and Ankur Banerjee in Singapore; Additional reporting by Chibuike Oguh in New York; Editing by Kirsten Donovan) Continue reading

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The Bears Are Refocusing On A Growth Scare

caracterdesignIt would be concerning if it weren’t so predictable. When disinflation stalled during the first quarter of this year, the bear camp insisted that the Fed would have to keep short-term interest rates higher for longer. They raised doubts about any rate cuts this year, due to “sticky” inflation and an economy that was far too strong. The signs that growth would slow, and that the disinflationary trend had reasserted itself were clear then, but not convenient for those who had a more negative outlook for the markets and economy. Fast-forward to today, when both have come to pass, and the bearish narrative has pivoted to assert that the Fed has waited too long. Overnight, the economy is weakening so rapidly that a recession may have already started, and the summer pullback in stock prices is the beginning of a bear market. I could not disagree more, so let me persuade you otherwise, as I warned several months ago that fearmongering about inflation fears would shift to warnings about economic growth on the cusp of the Fed’s first rate cut. Finviz On Wednesday, investors celebrated the fact that Chairman Powell did not push back on market expectations for rate cuts to begin in September, and the major market averages soared. Yesterday, the major market averages gave back all those gains, plunging over concerns that the Fed did not cut rates this week. Bond yields also plunged, with the 10-year Treasury yield (US10Y) falling below 4%, while the 2-year (US2Y) fell to just 4.16% in response to two economic reports that were weaker than expected. Bloomberg Initial unemployment claims rose last week by 14,000 to 249,000, which was 5% above the four-week moving average of 235,000 and the highest number since last summer. Additionally, continuing claims rose by 33,000 to 1.877 million. This caused major concerns, but claims have been rising, as we should expect with a softening economy, which is necessary to bring the rate of inflation down to target. Regardless, this number instigated fears that the economy is now weakening too rapidly. DataTrek Those fears were compounded by another dismal reading on the manufacturing sector, which has been idle for months. The ISM Manufacturing Purchasing Managers Index (PMI) fell from 48.5 to 46.6 in July, which takes it back down to levels last seen in October and November of last year. This reflects contraction in the sector, but it only represents 10% of economic activity, and it has been below the 50 level that marks growth for 20 of the past 21 months. I don’t see this as a fresh warning sign of impending doom for the economy. TradingEconomics To the contrary, the S&P Global Services Purchasing Managers Index (PMI) rose to a 28-month high of 55.3 in June, and the service sector dwarfs manufacturing in terms of its importance to the economy. TradingEconomics Lastly, I’d rather focus on real economic activity to gauge strength than the surveys that are conducted. On that note, consider that the four-week average of gasoline demand in the US is running 4% higher than it was a year ago. That is a real-time pulse on consumer activity, and it shows strength rather than weakness. It also falls in line with the service sector survey conducted by S&P Global for July. EIA We are still in the process of a summer pullback instigated by the exodus from overbought technology stocks, due to disappointing earnings reports and outlooks from the Magnificent 7, as well as other AI-fueled momentum plays. This is coming at the same time the Fed is about to ease monetary policy, which is raising fears that the central bank has made a policy mistake and waited too long to ease. Yet, the selloff in technology stocks is not indicative of an economy in trouble, as investors have rotated from growth to value where earnings growth rates are just starting to improve. This morning’s jobs report carries tremendous weight in the short term, given the concerns about economic growth. Yet, this initial estimate of how many jobs were created last month is far less important than the consuming activities of the existing labor force of 168 million. Continue reading

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Wall Street wanted a September rate cut—instead it got a ‘baby step’ and stocks are hurting as a result

On Monday, Wall Street was ready to scour remarks from Jerome Powell for hints he might deliver a much-anticipated interest rate cut in September. The hint never came.Today, the stock market is feeling the consequences.This week the Federal Open Market Committee (FOMC) met to discuss the base interest rate, which currently sits at a more than two-decade high.While analysts were largely prepared to hear a cut of the rate—currently targeted at 5.25% to 5.5%—wouldn’t come this month, they were waiting on a veiled nod that the committee’s next meeting would bring such relief next month.Wall Street is hankering after a rate cut for a range of reasons, but the key concern is that if the Fed cuts rates too late — keeping the supply of money too tight for too long — it will stifle consumer spending and business capital expenditure, grinding the economy to a halt and leading to a rise in unemployment.On the flipside, lower rates would mean cheaper borrowing and higher levels of consumer consumption.But instead of Powell dropping hints about a Q3 cut, analysts got a “baby step,” said Santander’s chief U.S. economist, Stephen Stanley.”Chairman Powell emphasized in his press conference that recent data on inflation have ‘added to’ the Fed’s confidence that inflation will return to the 2% target, but the Fed is not there yet,” he wrote in a note seen by Fortune.While the market had priced in a September cut, Stanley believes the news will come in November. “I am skeptical that the key economic data over the next seven weeks are going to add to the FOMC’s confidence,” he wrote.Likewise, Bank of America—even prior to the Fed’s July meeting—is not pricing in a rate cut until December.Yesterday credit strategist Yuri Seliger wrote in a note seen by Fortune that while Powell’s comments “largely agreed” with a September cut, there is a key caveat: that timing is “assuming no big surprises on inflation.”A day prior, Seliger’s colleagues—U.S. economist Michael Gapen, rates strategist Mark Cabana, and FX strategist Alex Cohen—wrote: “In our view, the main message from the July FOMC meeting is that the Fed is getting closer to a rate cut, but needs more evidence that inflation is under control before it does.”[Powell] indicated that there was increased confidence within the committee that a September rate cut could happen, but data between now and then would have to validate the Fed’s expectation. We think the Fed can be patient and wait for more evidence.”The less emphatic evidence of a September cut is likely one of many reasons the global stock market took such a heavy hit over the last few hours.At the time of writing the S&P500 is down 1.4% over the past 24 hours, while the Nasdaq is down 2.3% over the same time period.While some of this slump may be given a lackluster earnings call from Magnificent 7 stock Amazon, traders are also likely getting the creeping sense that the Fed may hang on too long.’Hedging bets is standard practice'”We haven’t made any decisions,” Powell told reporters in a press conference following the FOMC meeting this week. “I don’t know what the data will reveal or how that will affect the appropriate path of our policy.”While such a statement may have taken the wind out of other analysts’ sails, Mike Pugliese, senior economist at Wells Fargo, told Fortune he had a more balanced outlook.”I am confident that the FOMC will cut rates in September,” he said. “It is true that Chair Powell and the rest of the FOMC are hedging their bets, but that is standard practice in this kind of situation. It would be highly unusual for them to explicitly commit to a rate cut a full meeting in advance.”When reading between the lines, the signals were there yesterday, and the recent data for both the labor market and inflation suggest that a rate cut will be warranted at the next meeting.”The stock market’s overnight tumble might look tame compared to the upset that could come in September if the cut doesn’t materialize.”It is hard to speculate on what the impact would be if the Fed did not cut rates in September because we do not have the economic data that will be released between now and then,” Pugliese added. “For example, if the employment reports to be released on August 2 and September 6 are exceptionally strong and the next two CPI reports are also very ‘hot,’ then that would have different implications compared to a scenario where the economic data were generally weak between now and the Sept FOMC meeting but the Committee still chose not to cut rates.”Based on what we know now, no rate cut in September would come as a major surprise to us and to financial markets. Financial conditions likely would tighten if the FOMC adopted an unexpectedly hawkish stance over the next seven weeks.”Over at UBS Brian Rose, senior U.S. economist, is maintaining a milder stance on his previous statement that the market is pricing in “a near-100% chance of a September cut.”Yesterday in a note seen by Fortune, Rose added: “Our view remains that the upcoming data will be soft enough for the Fed to start trimming rates by 25 basis points quarter, but not so bad that they would want to cut at a more aggressive pace. However, risks are asymmetric.”This story was originally featured on Fortune.com Continue reading

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Stock market news today: Stocks tumble after weak economic data as 10-year yield falls below 4%

Another recession indicator is close to flashing red.The Sahm Rule, developed by economist Claudia Sahm, says that the US economy has entered a recession if the three-month average of the national unemployment rate has risen 0.5% or more from the previous 12-month low. The rule has successfully predicted recessions 100% of the time since the early 1970s.If Friday’s July jobs report reveals the unemployment rate rose to 4.2% during the month, the Sahm Rule would be triggered.But economists, including Sahm herself, are cautious about such an outcome being used to conclude a recession is imminent for the US economy given the current economic backdrop.”The rise in the unemployment rate is not as ominous as it would normally seem,” Sahm wrote in a July 26 post on Substack.Sahm reasons that the current uptick in unemployment doesn’t account for recent shifts in the labor market that haven’t been as common in prior occurrences where the Sahm Rule was triggered, including pandemic distortions of labor force participation and a massive increase in immigration. “In past recessions, the share of entrants — those without work history or those returning to the labor force — fell,” Sahm wrote. “The weakening in the labor market discourages them from looking for work. Currently, the entrant’s share is unchanged. That would be consistent with increased labor supply from immigrants pushing up unemployment and not a sign of weakening demand as is typical in a recession.”Bank of America Securities head of US economics Michael Gapen recently told Yahoo Finance he also doesn’t see the Sahm rule as a useful recession tool in the current economic moment.”The unemployment rate is rising largely because growth in the labor force from immigration is outpacing labor demand,” Gapen said.For now, Gapen said, the recent uptick in unemployment is not a story about firms cutting costs through more layoffs.Asked whether he was worried about the Sahm rule getting triggered at a press conference Wednesday, Federal Reserve Chair Jerome Powell said, “The question really is one of are we worried about a sharper downturn in the labor market. The answer is we are watching carefully for that.” He characterized the rule as a “statistical regularity.” “It’s not like an economic rule where it’s telling you something must happen.” Continue reading

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New data highlights emerging cracks in the economy as Fed debates rate cut

Two separate data releases highlighted signs of softening in the economy on Thursday as the Federal Reserve mulls over when to cut interest rates.Weekly jobless claims once again rose more than expected last week in the latest sign of a cooling labor market. New data from the Department of Labor showed 249,000 initial jobless claims were filed in the week ending July 27, up from 235,000 the week prior and the highest level since August 2023.Meanwhile, the latest reading on activity in US manufacturing showed the sector sank further into contraction during July. The ISM’s manufacturing PMI registered a reading of 46.8 in July, down from June reading of 48.5 and the lowest reading since November 2023.“Demand remains subdued, as companies show an unwillingness to invest in capital and inventory due to current federal monetary policy and other conditions,” Chair of the Institute for Supply Management Timothy Fiore said in a press release.The weaker-than-expected economic data sent the 10-year Treasury yield (^TNX) down about 12 basis points to 3.98%. This marked the first time the 10-year yield has fallen below 4% since February. Meanwhile, all three of the major stock indexes turned lower.”The ongoing deterioration in the economic data as evidenced by today’s rising initial jobless claims, low unit labor costs, and abrupt slowing in global manufacturing activity suggest that we are getting to a point where bad economic news is bad for markets,” Renaissance Macro’s head of economics research Neil Dutta wrote in a note on Thursday. “Until the Fed begins cutting, they are going to look behind the curve. In my view, the upshot is that this is a small policy mistake that can be undone very quickly.”The data comes less than 24 hours after the Fed held interest rates steady at the conclusion of its latest policy meeting. Chair Jerome Powell noted the central bank is still seeking further confidence in inflation’s path lower but also acknowledged a September interest rate cut is “could be on the table.”Powell noted the Fed is now more attentive to not only the risk of inflation not falling, but also the risk of unemployment continuing to tick higher. For now, Powell said the Fed still believes the labor market is in the process of a “gradual normalization.””If we start to see something that looks to be more than that, then we’re well positioned to respond,” Powell said.Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve Board Building Tuesday, Wednesday, July, 31, 2024, in Washington. (AP Photo/Jose Luis Magana) (ASSOCIATED PRESS)The concern among economists remains that there are already signs of slowing in the labor market that warrant a closer look from the Fed. In Thursday’s ISM report, the employment index tumbled to a reading of 43.4 in July, down from 49.3 in June.Capital Economics North America economist Thomas Ryan wrote in a note on Thursday that the decline in the employment index will likely “raise some eyebrows.” He added, “it suggests there is a risk that the labour market softens beyond the normalisation we have already seen.”Jefferies US Economist Thomas Simons noted that the rate cuts could help the sagging manufacturing sector but “it is looking more and more like it’s going to take more than a handful of 25 basis point moves.”Investors appeared to agree with Simons, as markets are now pricing in a 20% chance of a 50 basis point interest rate cut in September, nearly double the odds seen just a day prior, per the CME FedWatch Tool. Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.Click here for in-depth analysis of the latest stock market news and events moving stock pricesRead the latest financial and business news from Yahoo Finance Continue reading

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