The softening of the US labor market showed no signs of easing in July with nonfarm payroll growth falling significantly below expectations and last month\u2019s results while unemployment increased for the fourth consecutive month. In July, nonfarm payrolls climbed by 114,000, missing the expected increase of 176,000 and falling from June\u2019s downwardly revised level of 179,000. The gain in average hourly earnings also weakened, climbing 0.2% month over month and 3.6% year over year (y\/y) compared to analyst\u2019s expectations of 0.3%, and 3.7%. In June, the metrics advanced 0.3% m\/m and 3.8% y\/y.<\/p>\n\n\n\n
In a continuation of last month\u2019s trend of non-cyclical sectors fueling labor market expansion, more than half of recruiting activity was from the combination of the private education and health services category, which added 57,000 individuals to payrolls, and government, which expanded by 17,000 jobs. Within government, local education expanded by 26,200 but the gain was partial offset by a decline in non-education local government payrolls. Among sectors that contracted, information had the largest decline, surrendering 20,000 jobs. Other decliners included the financial activities category and professional and business services, which lost 4,000 and 1,000 jobs. Losses in those categories were more than offset by the private service-providing category increasing by 72,000 positions and construction gaining 25,000 workers.<\/p>\n\n\n\n Big tech companies are reporting a slowdown in some areas of consumer spending, but businesses are continuing to increase their advertising. Meanwhile, the race to build products for artificial intelligence has produced its first bloodshed, with shares of Intel falling nearly 30% this morning. Consider the following quarterly earnings highlights:<\/p>\n\n\n\n Risk assets are getting hammered on the back of joblessness worries and investors no longer reacting to negative economic developments favorably. Equity indices are selling off across the board with the Russell 2000, Nasdaq Composite, Dow Jones Industrial and S&P 500 benchmarks sinking 3.4%, 2.4%, 2% and 1.9%. Sectoral breadth is awful with 9 out of 11 segments pointing south on the session as consumer discretionary, technology and energy dive 3.6%, 3.1% and 2.8%. The defensive consumer staple and cyclical real estate areas are the only gainers, as traders hide for cover in names that are insensitive to economic weakness and stocks that benefit from an increasingly achievable housing affordability situation thanks to cratering rates. Furthermore, Treasurys are down a whopping 24 and 17 basis points in bull steepening fashion across the 2 and 10-year maturities, which are changing hands at 3.9% and 3.81%. We wrote last week that when these two rates meet, trouble is a near certainty, and we\u2019re definitely seeing rising odds of further downside in equities. The dollar is also tanking as rate watchers raise the odds of a 50-bp reduction in September rather than a traditional 25. It\u2019s depreciating relative to all of its major counterparts, including the euro, pound sterling, franc, yen, yuan and Aussie and Canadian dollars. Commodities are mixed though, with copper and lumber gaining 0.8% and 0.3% on improved outlooks for manufacturing and real estate. Meanwhile, WTI crude oil, gold and silver are lower by 4.4%, 3.8% and 0.7%.<\/p>\n\n\n\n The steepening of the yield curve coinciding with late-cycle economic dynamics is a quintessential signal of an equity market correction. Occurring simultaneously, however, are headwinds in Tokyo, sluggish activity in Beijing, disappointing artificial intelligence prospects, geopolitical uncertainty and a hot election season. To add to the list, the third quarter is the worst from a seasonal perspective, and should we enter recession in the next few months, a 25% equity drawdown is in the cards. I\u2019ve previously expected a decline of up to 15%, but the path to more downside has opened up. Firms are not going to make the numbers, similar to 2022, when most of Wall Street yelled no recession but earnings declined. What\u2019s different from that period, however, is that the job market held up and we saw more of an affordability recession in the accounting rather than a traditional one like we see in the Great Depression movies when folks are standing in line looking for work. This time though, the probability of recession has risen to 65%, and we will likely experience a deterioration in profits as well as an announced downturn, as the unemployment rate ticks up to 6.5%.<\/p>\n\n\n\n![\"\"](\"\/campus\/wp-content\/uploads\/sites\/2\/2024\/08\/Unemployment-Rate-8-2-24.png\")
<\/figure>\n\n\n\nTech Disappoints as Consumer Spending Weakens<\/strong><\/h2>\n\n\n\n
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A Bad Day for Risk Assets<\/strong><\/h2>\n\n\n\n
The Bears Have Legs<\/strong><\/h2>\n\n\n\n