The first piece of the puzzle activating the "August curse"? U.S. non-farm payroll far below expectations, Wall Street in panic selling.

With the ongoing high inflation faced by the US economic growth, heavy tariffs, and increasing uncertainty in consumer spending, the US labor market is clearly shifting downwards. The latest nonfarm payroll data, as well as revisions to previous months, show a sharp slowdown in job growth in the past three months. This weak and below-expectation nonfarm payroll report significantly raises expectations of a rate cut by the Federal Reserve. The current rate futures market is betting on two rate cuts in September and December, compared to just one or even no rate cut before the weak nonfarm payroll was released. The first important piece of the puzzle regarding the "August stock market sell-off curse" has been put into place for Wall Street bulls and global stock markets. According to the employment report released by the US Bureau of Labor Statistics on Friday, the US added only 73,000 nonfarm payroll jobs in July, far below economists' expectations of 110,000 jobs. The previous two months also saw a total decrease of nearly 260,000 jobs. The downward revision has shocked Wall Street, igniting selling sentiment and giving bearish forces an advantage. The revised data shows that only 35,000 jobs were added on average per month in the past three months, the worst performance since the onset of the COVID-19 pandemic. The unemployment rate in the previous month also rose slightly to 4.2%, in line with market expectations. The latest nonfarm payroll data further indicates a significant weakness in the labor market. Not only has job growth slowed significantly and the unemployment rate risen, but previously released data on jobless claims, layoffs, and job vacancies indicate that it is becoming harder for unemployed individuals in the US to find new jobs, and wage growth has essentially stagnated. These latest labor market data pose significant risks to the ongoing trend of slowing consumer and business spending. Prominent journalist Nick Timiraos, known as the "mouthpiece of the Federal Reserve," stated after the release of the nonfarm payroll report that the slowdown in job growth over the past three months may have opened the door for Fed officials to consider a rate cut at their next meeting in September. "At the very least, this highlights the difficult balance they face amid an economic slowdown and rising inflationary pressures. Fed officials had been comfortable with keeping rates unchanged for the remaining year given the robust job growth in the labor market. But the significant downward revisions to the May and June jobs data changed the picture," Timiraos wrote in a tweet. Analyst Ali Jaffery from CIBC wrote after the release of the nonfarm payroll data: "Today's report shows a completely different situation in the job market from what Powell described earlier this week, and increases the likelihood of a rate cut by the Fed in September. However, this will depend on whether upcoming inflation reports show sustainment and if the job market further weakens. After all, the unemployment rate is still at a reasonable level, and even if the report is worse, it may not be enough to completely change the stance of all hawkish officials." Chief economist Kathy Bostjancic from Nationwide stated, "The cracks in the labor market have significantly widened, further intensifying the pressure for a rate cut by the Fed and supporting the views of dissenting Fed Board members that the FOMC should cut rates this week." After a fiercely hawkish press conference, Powell was undercut by the nonfarm payroll report A series of heavyweight data this week has shown a weakening intrinsic momentum in the US economy and a stagnation in the cooling trend of inflation - all signs that the "stagflation" that Wall Street and the Fed most fear is getting closer to the US economy, one of the reasons why Fed officials have once again maintained the rate unchanged amidst differing opinions. During a press conference following the decision to keep the benchmark interest rate unchanged on Wednesday, Fed Chairman Powell still insisted that the US labor market was "rock solid" and warned global central banks to be wary of the reemergence of inflation risks - especially against the backdrop of escalating tariffs by Trump, which could gradually lead to rising inflation. Powell reiterated several times in his post-conference remarks that the US labor market remains robust, but there is an upward risk of inflation, and maintaining rate stability is a "cautious move." He also noted that the impact of changes in Trump administration policies remains uncertain, and the sensible assumption currently is that the effects of tariffs on inflation will be short-term, but they may make inflation effects more stubborn. While the impact of tariffs on inflation has begun to show, it is still too early to determine its extent. After the latest nonfarm payroll data was released, the futures of the three major US stock indices plummeted, selling sentiment pervaded Wall Street and global stock markets, US bond yields and the dollar decreased. The Federal Reserve will see another nonfarm payroll report and several inflation data before its meeting in September. It is understood that the weak growth in nonfarm payrolls in July mainly reflects the massive losses of jobs in the manufacturing, professional and business services, as well as government sectors. The significant overall downward revisions in the previous two months are largely attributable to major adjustments in employment positions in local government education sectors. Private sector employment, on the other hand, picked up growth after nearly stagnating in June, mainly driven by the healthcare and social assistance industry. Trump's cuts in government spending continue to impact the US job market. Federal government positions have decreased for six consecutive months in July, and the unemployment rate continues to rise in government job concentrations such as Washington, D.C. US universities and non-profit organizations that depend on federal funding have also suffered from layoffs. Demand in other sectors of the labor market remains generally healthy. Job vacancies remain higher than pre-COVID-19 levels, initial claims for unemployment benefits have declined in recent weeks but the number of ongoing claims has significantly increased, suggesting that employees who have been laid off or resigned are finding it difficult to find new jobs. Overall layoffs remain at historically low levels, but influenced by factors such as the rise of artificial intelligence, layoffs in the US tech industry are increasing, especially with US tech giants like Microsoft announcing layoffs of up to 15,000 employees, accounting for about 5% of its global workforce. Labor force participation rate also shows cause for concern The US nonfarm payroll report includes two surveys - the establishment survey producing employment data and the household survey releasing figures on unemployment rate and labor force participation, among other indicators. The labor force participation rate - the proportion of the working-age population either employed or actively seeking employment - has fallen to 62.2%, the lowest in nearly three years; the prime age labor force participation rate (25-54 years old) has also declined. Some economists attribute a significant decrease in the participation rate to strict immigration policies under Trump leading to a large-scale exodus of foreign undocumented workers from the labor market, significantly dragging down the participation rate and to some extent constraining the rise in the unemployment rate. The increase in the unemployment rate partly stems from more people being laid off or leaving their jobs voluntarily, a trend particularly prevalent in the US tech industry with the rise of artificial intelligence. The latest nonfarm payroll data shows that the number of individuals unemployed for 27 weeks or more unexpectedly rose to 1.83 million, the highest since the end of 2021. Additionally, the number of individuals forced to work part-time for economic reasons has been increasing. Federal Reserve officials are closely monitoring how the dynamics of supply and demand in the US labor market affect wage growth, especially amidst rising inflation risks. The July nonfarm payroll report shows that average hourly earnings increased by 3.9% compared to the same period the previous year, in line with expectations. Will the negative impact of this nonfarm payroll data cause a downturn in the stock market? A study by J.P. Morgan's market intelligence team on the eve of the nonfarm report's release shows that if the nonfarm payroll is between 80,000 and 100,000, there is a 25% chance the S&P 500 index will fall by 0.5% to 1%; if the nonfarm payroll is below 80,000, with only a 5% chance of occurrence - unfortunately, the July nonfarm payroll was below this pessimistic level and the S&P 500 index is thus expected to drop by 1.5% to 2.5%. The "August curse" is about to be fully awakened? Historical data shows that the largest stock market volatility often occurs in August. What's worse, August is typically one of the two worst-performing months in the stock market throughout the year. After breaking records of consecutive gains since 2020, the S&P 500 index, with valuations near all-time highs, is about to enter the traditionally challenging "annual tough period." Data shows that over the past thirty years, the benchmark index has performed the worst in August and September, with an average decline of 0.7%, while in other months, the average increase is 1.1%. Analysts generally believe that this seasonal selling feature is partially due to fund managers typically reassessing their portfolios for the rest of the year during this period. This sensitive window in August-September this year, with any news of Trump's tariffs, economic data, Fed rate paths, or corporate earnings, could trigger substantial stock market sell-offs. Thus, some Wall Street analysts indicate that the first core of activating this curse lies in the weak nonfarm data. Before the release of the nonfarm data, some investment firms advised taking advantage of the low hedging costs and low volatility periods to "sell high" or adopt hedge strategies to protect investment portfolios. So far, Wall Street has been bullish on the stock market for the long term, mainly due to the strong expectations of a "soft landing" for the US economy and steady profit performance of tech companies closely related to AI. However, there are still worrisome aspects: valuations have been continuously pushed higher, and there remains significant uncertainty in trade negotiations. At the same time, the Chicago Board Options Exchange Volatility Index (VIX) is not far from its lowest levels since February, making it suitable for hedging configurations during periods of low costs. For the stock market, how will this nonfarm data impact the negative market sentiment? J.P. Morgan's market intelligence team's research showed that if nonfarm jobs are between 80,000 and 100,000, there is a 25% chance that the S&P 500 index will fall by 0.5%-1%; if nonfarm jobs are below 80,000, with only a 5% chance of occurrence - unfortunately, the July nonfarm jobs were below this pessimistic level, so the S&P 500 index is expected to fall by 1.5%-2.5%.