- Recent US data has come in poorer than expected, raising doubts about a soft landing.
- The US unemployment rate hit a three-year high of 4.3%.
- The US ISM services PMI increased from 48.8 to 51.4.
Equities fell sharply on Monday as fears of a recession in the US continued to unsettle investors. At the same time, Apple’s stock significantly dropped after a prominent investor sold its shares.
Since last week, investors have been dumping risky assets and buying safer ones due to fears that the US economy is slowing down rapidly. Initially, downbeat data was bullish for equities because it meant a higher likelihood of Fed rate cuts. Lower borrowing costs spur economic growth and benefit businesses. However, markets hoped the Fed would achieve a soft landing, where inflation falls without significantly hurting the economy.
Unfortunately, recent data has come in poorer than expected, raising doubts about a soft landing. US manufacturing sector activity reached an eight-month low in July. The manufacturing sector powers over 10% of the economy. Therefore, signs of weakness can be alarming.
Nevertheless, the US nonfarm payrolls report was the primary catalyst for the recent market turmoil. On Friday, data showed that the economy created 114,000 new jobs in July, compared to the expected 175,000.
Meanwhile, the unemployment rate hit a three-year high of 4.3%. The report should have benefited equities since it increased rate-cut expectations. Markets were pricing an 86% chance of a 50-bps rate cut in September. Meanwhile, the likelihood of a 25-bps cut fell to 14%.
However, a recession would show that higher interest rates have had a bigger-than-expected negative economic impact. Therefore, investors panicked. Wall Street’s fear gauge closed at the highest level since October 2020.
US service sector activity (Source: ISM)
However, a brief rebound was seen on Monday when the ISM released upbeat service activity data. The ISM services PMI increased from 48.8 to 51.4, beating expectations for 51.0. The service sector drives nearly two-thirds of the economy. Therefore, when the sector is expanding, the economy is steady. As a result, Fed rate cut expectations eased slightly.
Equities have also collapsed due to recent poor earnings. Major tech companies have given poor forecasts, fueling recession fears. At the same time, analysts have downgraded earnings expectations after the recent reports.
Elsewhere, Apple shares plunged on Monday after Berkshire Hathaway reduced its stake in the company by half. This move indicates that the company’s outlook might be dim.
