Weaker-than-expected U.S. jobs figures have sparked renewed bets on Federal Reserve rate cuts, setting off a chain reaction across global markets—from rising equities to a weaker dollar and a surge in gold prices.
Market Reaction Overview
The August employment report delivered a shock that reverberated through global financial markets, with the U.S. economy adding just 22,000 jobs in August, below even a muted forecast of 75,000. Perhaps more concerning were the substantial downward revisions to prior months, with June revised down to a net loss of 13,000 jobs and July gains upwardly revised by only 6,000 to 79,000.
The weak data immediately triggered a flight to quality investments and a rapid repricing of Federal Reserve policy expectations. Stocks initially rose after the weaker-than-expected jobs report, as traders ramped up bets that the Federal Reserve will cut interest rates this fall. But the gains were short-lived as Wall Street reckoned with the prospect of a weakening economy.
Treasury bonds experienced their strongest rally in months, with two-year yields hitting the lowest level since 2022 as investors sought safe-haven assets. The benchmark 10-year Treasury yield fell sharply to around 4.09%, reflecting growing confidence that the Fed will need to act aggressively to support the slowing economy.
Meanwhile, the dollar index suffered its worst weekly performance in months, declining nearly 1% as rate-cut expectations reduced the appeal of U.S. assets for international investors. The weakening dollar provided a significant boost to dollar-denominated commodities, particularly gold.
Federal Reserve Outlook
The employment data has fundamentally shifted market expectations for Federal Reserve policy. The CME Group’s FedWatch tool shows there’s a 12% chance of a 50 basis point rate cut in September, up from zero on Thursday, while the probability of at least a quarter-point cut has reached near certainty.
“September is a lock for a rate cut, and it might even be a 50-basis-point move to make up the lost time,” according to market analysts who noted that the Fed may regret holding rates steady at their July meeting.
Fed officials themselves have begun acknowledging the changing landscape. A top official at the Federal Reserve said Saturday that this month’s stunning, weaker-than-expected report on the U.S. job market is strengthening her belief that interest rates should be lower. The official noted that the jobs report showed that employers hired far fewer workers last month than economists expected and that hiring in prior months was much lower than initially thought.
Money markets are now pricing in nearly three full rate cuts by year-end, representing a dramatic shift from earlier expectations of potentially no cuts at all. This repricing reflects growing concerns that the Fed may have kept policy too restrictive for too long, risking a harder landing for the economy.
Currency Markets
The U.S. dollar’s decline has been swift and broad-based, with the dollar index down almost 10% this year. The weakness stems from multiple factors beyond just rate-cut expectations.
“Another soft nonfarm payrolls report has put the dollar on the back foot again,” Jonas Goltermann, deputy chief markets economist at Capital Economics, said. He explained that Fed rate cuts can lower Treasury yields, making the bonds relatively less appealing for global investors and leading to less demand for dollars.
The dollar’s decline has implications far beyond U.S. borders. For global trade, a weaker dollar makes U.S. exports more competitive while potentially increasing inflationary pressures in countries that import dollar-denominated goods. Central banks around the world are also reassessing their reserve compositions, with many reducing dollar holdings in favor of alternative assets.
European currencies have benefited from dollar weakness, with the euro and British pound both gaining ground. However, analysts caution that the European Central Bank’s own policy stance will be crucial in determining whether these gains can be sustained.
Safe-Haven Assets
Gold has emerged as perhaps the biggest beneficiary of the shifting monetary landscape. Gold sailed past $3,500 per ounce to a record high Tuesday, as a weaker dollar and mounting expectations of a Federal Reserve interest rate cut in September boosted the precious metal’s appeal.
The precious metal’s rally has been remarkable, with bullion gaining more than 30% so far this year. Multiple factors are driving this surge beyond just rate-cut expectations.
“A corollary of the weaker economic backdrop and expectations of US rate cuts is boosting precious metals,” Capital.com financial market analyst Kyle Rodda said. He also pointed to “the festering confidence crisis in dollar assets because of US President Donald Trump’s attack on Fed’s independence” as an additional supportive factor.
Central bank buying has provided crucial support for gold prices. That includes China’s central bank adding gold to its reserves for the ninth consecutive month in July, while World Gold Council data shows central banks plan to increase gold holdings as a share of their reserves, while reducing dollar reserves over the next five years.
Silver has also surged, rising as much as 2.6% to $40.7599 an ounce — taking gains this year to about 40%, marking its highest level since 2011.
Bond markets have experienced a significant rally, with investors piling into Treasuries as both a safe haven and a bet on future rate cuts. The yield curve has steepened as short-term rates have fallen more dramatically than long-term yields, reflecting expectations that the Fed will cut short-term rates while long-term inflation expectations remain relatively stable.
Energy and Commodities
While precious metals have soared, energy markets have faced headwinds from concerns about global economic growth. Oil prices have declined as investors worry that slowing job growth could signal broader economic weakness that would reduce energy demand.
OPEC+ dynamics are also weighing on oil prices. The cartel is considering potential production increases at upcoming meetings, which could add supply to a market already concerned about demand destruction from economic slowdown.
Other industrial commodities have shown mixed performance, with copper and other base metals reflecting the tension between potential Fed easing (supportive) and economic growth concerns (negative). Agricultural commodities have been influenced more by weather patterns and seasonal factors than by the jobs data.
Implications for Investors
The market upheaval triggered by weak jobs data presents both opportunities and challenges for investors across asset classes.
Equity markets face a complex calculus. While lower interest rates typically support stock valuations by reducing borrowing costs and making stocks more attractive relative to bonds, the underlying reason for rate cuts—economic weakness—poses risks to corporate earnings growth.
“Do we want the Fed to cut? Yes,” Hogan said. “But do we want the Fed to need to cut? No, that’s bad news for the economy and market”. This sentiment captures the market’s ambivalence about the current situation.
Fixed-income investors are positioned to benefit from the rally in bond prices, particularly those holding longer-duration securities. However, those seeking income from new bond purchases will face lower yields as rates decline.
Currency hedge considerations have become more important for international investors, as dollar weakness affects the relative performance of global assets when measured in dollar terms.
For individual investors, the environment suggests the importance of diversification across asset classes and geographic regions. The traditional 60/40 stock-bond portfolio may need adjustment as correlations between assets shift in response to changing monetary policy expectations.
Bottom Line: Weak U.S. employment data has catalyzed a broad reallocation of global capital, with investors betting heavily on Federal Reserve rate cuts while seeking refuge in traditional safe-haven assets. While markets are celebrating the prospect of easier monetary policy, the underlying economic weakness that’s driving these expectations presents ongoing risks that investors will need to carefully navigate in the months ahead.
Sources: Federal Reserve, Bureau of Labor Statistics, Reuters, Bloomberg, CME Group
