09/02/2024

Although we closed August with global equity indices in positive territory (and, in some cases, at record highs), few would have been able to discount this result in the first week of the month. The month of August was marked by a bout of extreme volatility, starting after the release of disappointing July employment data in the United States, which led investors to fear a sharp slowdown in activity in the country. Meanwhile, a number of other factors, such as the sudden appreciation of the yen after the Bank of Japan's surprise interest rate hike, triggered risk aversion and a frenzied outflow of investors from numerous asset classes.

Fortunately, the subsequent release of data substantiating the underlying strength of the U.S. economy helped to restore investor optimism. Last week, for example, the U.S. macroeconomic
agenda delivered just what investors wanted to hear: prices remain on a course of moderation while the economy maintains a significant degree of strength. Consequently, the market is once again confident that the Federal Reserve has managed to win the battle against inflation without triggering an economic recession in the process, which has consolidated the recovery of the stock markets for the month as a whole.

However, the U.S. jobs report for August, which will be released in the afternoon of Friday, September 6, will be a key touchstone for maintaining this narrative and even more important than the central bankers' meeting at Jackson Hole or Nvidia's results. First of all, the risks looming ahead of this crucial macroeconomic data appear to be highly asymmetric: on the one hand, strong U.S. job creation in August is unlikely to derail the Fed's expected rate cut in September or subsequent gradual rate cuts, not least because the price data remains consistent with the expectation that the Federal Reserve will be able to steer prices towards its long-term targets.

By contrast, a second consecutive downside surprise in employment would only bolster fears that the U.S. labor market is on a knife edge, requiring a rapid and deep interest rate tightening cycle by the Federal Reserve. This would trigger a further sharp repricing of major financial asset prices and potential bouts of high volatility. Ultimately, depending on the employment data released next Friday, it will be possible to anticipate whether the Fed's rate cut in September will be 25 or 50 basis points.

We are leaning toward the former. This forecast is based primarily on the premise that the July jobs report was skewed by Hurricane Beryl and, secondly, on macroeconomic evidence pointing to continued healthy demand. Accordingly, the data continues to indicate that while the economy may be slowing compared to previous quarters, it continues to show signs of robustness. Revised second-quarter GDP and strong personal spending data for July, released last week, should support this forecast.

In short, if the employment data for August are in line with consensus forecasts (i.e., an estimated 165,000 jobs created and an unemployment rate decrease of one-tenth of a percentage point to 4.2%), there will be no cause for alarm, and the markets will be able to maintain their upward trend. Similarly, if the report exceeds analysts' expectations, the Fed's next rate cut of 25 basis points on September 18 will likely remain undisputed.

By contrast, a further increase in the unemployment rate or a disappointing number of new payrolls would reignite fears of recession on the other side of the Atlantic and would most likely trigger investment uncertainty and declines in the price of risky assets., Although this is not our main scenario, we also cannot rule it out.