Two separate data releases on Thursday pointed to signs of weakening in the economy as the Federal Reserve ponders when to cut interest rates.
Weekly jobless claims again rose more than expected last week, in the latest sign of a cooling labor market. New data from the Ministry of Labor showed that 249,000 initial unemployment claims were filed in the week ending July 27, up from 235,000 the week before and the highest level since August 2023.
Meanwhile, the latest figures on US manufacturing activity showed the sector sliding further into contraction in July. The ISMs manufacturing PMI recorded a reading of 46.8 in July, down from 48.5 in June and the lowest reading since November 2023.
Timothy Fiore, president of the Institute for Supply Management, said: “Demand remains subdued as companies are reluctant to invest in capital and inventory due to current federal monetary policy and other conditions. said in a press release.
The weaker-than-expected economic data caused the yield on ten-year government bonds (^TNX) to fall about 12 basis points to 3.98%. This was the first time since February that the ten-year yield fell below 4%. Meanwhile, all three major stock indexes are lower.
“The continued deterioration in economic data, as evidenced by current rising unemployment claims, low unit labor costs and the abrupt slowdown in global manufacturing activity, indicates that we are reaching a point where bad economic news is bad for markets,” says Renaissance Macro head of economic research Neil Dutta wrote in a note on Thursday. “Until the Fed starts cutting spending, they will be looking behind the curve. In my view, the result 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 end of its latest policy meeting. Chairman Jerome Powell noted that the central bank is still looking for further confidence in the downward inflation path, but also acknowledged that a rate cut in September “could be on the table.”
Powell noted that the Fed is now paying more attention to not only the risk that inflation does not fall, but also the risk that unemployment continues to rise. For now, Powell says the Fed still believes the labor market is in a process of “gradual normalization.”
“If we see something that appears to be more than that, then we are well positioned to respond,” Powell said.
Concerns remain among economists that there are already signs of a slowdown in the labor market that warrant further scrutiny by the Fed. In Thursday’s ISM report, the employment index fell to 43.4 in July, down from 49.3 in June.
Capital Economics North American economist Thomas Ryan wrote in a note Thursday that the decline in the employment index will likely “raise some eyebrows.” He added: “This suggests there is a risk of the labor market softening further than the normalization we have already seen.”
US economist Thomas Simons of Jefferies noted that the rate cuts could help the sagging manufacturing sector, but “it increasingly looks like more than a handful of 25 basis point moves will be needed.”
Investors appeared to agree with Simons as markets are now pricing in a 20% chance of a 50 basis point rate cut in September, almost double the probability seen a day earlier. according to the CME FedWatch Tool.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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