Global markets are feeling the tremors after disappointing U.S. jobs data, shaking faith in a smooth economic landing. The world’s largest economy saw its unemployment rate surge to 4.3% in July, nearing a three-year high, stoking fears of a looming recession.
This spike has triggered the “Sahm rule,” a historical indicator that a recession might be underway when the unemployment rate jumps by half a percentage point over a three-month average.
Yet, the reaction might be more bark than bite. Some economists argue the data could be skewed by factors like immigration and Hurricane Beryl. Moreover, better-than-expected jobless claims on Thursday brought some relief, sparking a rally in stocks. “Payrolls are still growing,” notes Dario Perkins of TS Lombard, adding, “If they turn negative, that would signal a real recession.”
The U.S. economy isn’t faltering just yet. It posted a robust 2.8% growth in the second quarter, doubling the pace from the first quarter, while services activity continues to show strength. However, the global scene isn’t as rosy. Europe is grappling with stalling growth, and China’s recovery remains on shaky ground. Citi’s surprise index shows global economic data delivering more negative surprises, a trend not seen since mid-2022.
Despite the market volatility, with MSCI’s global stocks index down over 6% from July’s highs and the S&P 500 shedding more than 4% in August, analysts aren’t hitting the panic button. Stocks are still up around 7% globally this year, and Goldman Sachs suggests that even a further 10% dip in U.S. equities would trim growth by less than half a percentage point over the next year.
The real focus might need to be on credit conditions. While the risk premiums on corporate bonds have widened in Europe and the U.S., business analysts believe these moves are corrections from historically tight levels, not yet a harbinger of severe recession risks.
In this swirling uncertainty, the markets are signaling caution, but not alarm. Investors are watching closely, but it seems the sky isn’t falling—at least not yet.
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