Europe heads lower as the fate of markets rest in the hands of the US jobs report

• European markets head lower after weak German industrial production data
• All eyes on US jobs report as US economy comes under pressure
• ADP and challenger data raises concerns ahead of NFP

A rather predictably pessimistic start for European equities, as traders remain fearful of what looks like the most important US jobs report of the year. The concerns of a potential major economic downturn in the US does raise questions around valuations for some of the US stocks that are already priced for substantial growth in the coming years. While the speculation surrounding the trajectory of US growth has predominantly affected the outlook for both US businesses and the dollar, we have seen plenty of contagion as the risk-off tone drags European and Asian markets lower. For Europe, there are ample reasons to be concerned about growth, with the German industrial production falling into the second biggest monthly decline in over a year (-2.4%). Fortunately for both the US and Europe, the dominance of the services sector means that we cannot simply look at manufacturing weakness and predict a recession.

Today’s US jobs report appears to hold the keys to public perception over whether we are seeing the US economy falling into a recession, despite the fact that the likes of the Atlanta Fed currently predict Q3 GDP to come in at a healthy 2.1%. The rise in US unemployment last month triggered the now widely touted Sahm rule, which essentially draws a relationship between a short-term rise in unemployment with prior recessions. There are some hopes that last month’s rise to 4.3% unemployment could have been driven by short-term factors such as Hurricane Beryl. Thus, in a best-case scenario, we could see unemployment head lower allowing markets to breathe a sigh of relief.

The data we have already seen provide little room for optimism, with the ADP payrolls falling below 100k for the first time since January 2021, and Challenger reporting the highest number of August jobs cuts since 2009. Nonetheless, that Challenger report does highlight a potential justification for why we might see the US avert a recession despite rising unemployment, with a growing number of firms attributing their layoffs to artificial intelligence. Coming at a time where markets have been booming off the back of speculated AI benefits, it stands to reason that at some point we start to see those AI investments translate into cost efficiencies as they lean more heavily on this groundbreaking technology. In any case, a weak jobs report today looks to nail on a 50-basis points cut from the Fed this month, which could once again raise concerns that a further unwinding of the USDJPY carry trade could pressure US stocks once again. As such, even bulls are likely to hope for a calm 25-basis point per meeting downward trajectory for rates given that it highlights a confidence that the economy remains within ‘soft landing’ territory.