August 2 – Yesterday’s big reversal lower carried into the night session, with stock futures continuing their liquidation phase on a pivot of Wall Street sentiment ahead of today’s big jobs report. The VIX rose to a 15-week high near 21 overnight as anxiety rose on Wall Street, led by active selling in the tech sector, despite plunging Treasury yields as money flows into the relative safety of government securities. Yet, the markets are trying to stabilize this morning. The dollar index followed Treasury yields lower to trade near 103.5 this morning. Yields on 10-year Treasuries made new eight-month lows this morning near 3.79%, while yields on 2-year Treasuries dropped to their lowest level since May 2023 near 3.84% as the yield inversion collapses. Crude oil prices are more than 2% lower after breaking below $75 per barrel once again, while the grain and oilseed sector firm, with corn and soybean prices bouncing modestly following the release of StoneX’s customer survey production estimates.
The economy created just 114K jobs in July, down from analyst expectations of 180K jobs. Furthermore, the June number was revised lower by 27K to 179K jobs created. The unemployment rate rose to 4.3% in July, up from expectations that it would remain flat at 4.1%. Among the unemployed, the number of people on temporary layoff rose to 1.1 million last month, up 249K from the previous month. However, the number of people who permanently lost their job remained little changed at 1.7 million. The number of long-term unemployed was also little changed at 1.5 million in July. The labor participation rate was up slightly to 62.7%, which is near where it’s been for much of the past year. The number of people employed part time for economic reasons increased to 4.6 million, up 346K on the month. There are also 5.6 million people not in the labor force who say that they want a job, which is up 366K this month. Healthcare added another 55K jobs in July, while construction added 25K and government added 17K.
Average hourly earnings rose by 0.2% to $35.07 in July, which was less than the 0.3% expected by analysts. Average hourly earnings are up 3.6% year-on-year, down from 3.9% the previous month, and below analyst expectations of 3.8%. The average workweek dropped to 34.2 hours in July, down from 34.3 hours previously. Putting it altogether, the economy created fewer jobs, the unemployment rate ratcheted higher to a still historically low 4.3%, and wage inflation is finally coming down. Wall Street has rallied nearly every time that we’ve had bad news, because it meant that the Fed would likely start cutting rates later this year. The Fed essentially threw it a bone on Wednesday by all but saying that rate cuts will start in September, and now Wall Street is throwing a fit because the rate cuts are too little too late in its eyes. Suddenly bad news is bad news, and Wall Street is in a panic.
Keep in mind that the Fed only controls the short-term overnight interest rate, while it can have some influence on mid- and long-term rates. But the market primarily controls the mid- and long-term rates, and the market is doing its job. We’re seeing Treasury yields at their lowest level in six to eight months this morning. That is stimulatory for the economy. The market is doing its job. The ironic thing is that we probably will not see the stimulatory effects of this rate cut fully show up in the data prior to the September Fed meeting. The risk here is that the market volatility will now create panic among consumers, voiding the stimulatory effect of the lower interest rates. We’ve seen the consumer respond each time that interest rates dipped over the past couple of years, but that won’t happen if market volatility creates fear in the consumer. That then creates a fear that becomes self-fulfilling, which can create some genuine risks for the economy. The other factor at play here as well, to some extent, is the rising geopolitical risks in the Middle East. Our economy has become relatively desensitized to these geopolitical risks over the past couple of years, but escalation now at a time when Wall Street is breaking hard can have a “piling on” effect on consumer confidence, adding to our economic woes, at a time when China’s economy continues to slide as well.
StoneX’s customer survey pegged this year’s corn yield at 182.3 bushels per acre, with soybeans at 52.6 bpa, above USDA’s trend yields of 181.0 and 52.0 bpa respectively. The market found comfort in these numbers, even though they came in above USDA’s trend yields. That’s largely because this year’s high subjective condition ratings combined with satellite derived NDVI scores were high enough to suggest the possibility of yields much higher than those reported by StoneX. Other private estimates will come out in the days ahead, and there will be many crop tours this month. As such, corn and soybean prices were able to post a modest bounce, despite a broader “risk-off” environment on Wall Street, at least in overnight trade. However, Wall Street will largely set the tone today. Will money flow into commodities perceived to be under-valued, or will it simply flow to the safety of the sideline? Or will the market find its footing ahead of the weekend? Perception is reality on Wall Street, and emotions will play a big part in shaping perception as we go through the day today. Low prices create demand once buyers feel that it is safe to venture out once again.
