[New York Stock Market] US Recession Fears and Yen Carry Unwinding Lead to Worst Day in 2 Years... Nasdaq Plummets 3.43%

US Employment Data Fuels Recession Fears
'Yen Carry Trade Unwinding' Also a Negative Factor
US Services PMI Improvement Narrows Decline
Evans, Chicago Fed President, Says "No US Recession"
Jeremy Siegel Urges 'Emergency Rate Cut'

Following panic selling triggered by fears of a US-originated economic recession sweeping through Asian stock markets, the three major indices of the New York Stock Exchange all closed sharply lower on the 5th (local time). The market decline is attributed to recession fears sparked by the July employment report shock, coupled with global capital outflows due to the unwinding of the yen carry trade. Amid calls in the market for the US Federal Reserve (Fed) to hold an emergency meeting to cut interest rates, voices cautioning against overreaction, arguing that the US economy remains resilient, are also emerging.

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Investor Sentiment Worsens Amid US Employment Data-Induced Recession Fears and Yen Carry Trade Unwinding

On that day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average, centered on blue-chip stocks, closed at 38,703.27, down 1,033.99 points (2.6%) from the previous trading day. The large-cap-focused S&P 500 index fell 160.23 points (3%) to close at 5,186.33. Both indices recorded their largest daily declines since September 2022. The tech-heavy Nasdaq index dropped 576.08 points (3.43%) to close at 16,200.08.

The market sell-off was triggered by a combination of recession fears due to weak US employment data, global capital outflows caused by the unwinding of the yen carry trade, and concerns over an artificial intelligence (AI) bubble. Additionally, rising risks of a full-scale war between Israel and Iran further dampened investor sentiment. However, the market avoided a repeat of the previous day's massive Asian market crash reminiscent of the 1987 'Black Monday' stock market crash.

The July employment report released by the US Department of Labor on the 2nd was the biggest negative catalyst for the market decline. According to the report, nonfarm payrolls increased by 114,000, and the unemployment rate rose to 4.3%. The employment increase fell significantly short of the forecast (176,000), and the unemployment rate rose faster than expected (4.1%), intensifying fears of a US economic recession.

Intensifying Recession Debate: "Fed Needs Emergency Rate Cut" vs. "US Not in Recession"

This has fueled theories that the Fed missed its chance to cut rates in July. The Fed had held the benchmark interest rate steady at 5.25-5.5% two days before the July employment report release, raising concerns that it missed an opportunity to respond to recession risks. Some argue that the Fed should implement an emergency rate cut. Jeremy Siegel, a globally renowned investment strategist and professor at the Wharton School of the University of Pennsylvania, urged the Fed to cut the benchmark rate by 0.75 percentage points immediately. He further advocated for an additional 0.75 percentage point cut at the September Federal Open Market Committee (FOMC) meeting. He emphasized, "The current US benchmark rate should be between 3.5% and 4%. The Fed should not assume it knows everything. The market knows more than the Fed, and the Fed must respond."

Investors are betting on a 'big cut' of 0.5 percentage points in September. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market currently prices in an 83.5% probability that the Fed will cut rates by more than 0.5 percentage points in September. The likelihood of a rate cut exceeding 0.75 percentage points by November is priced at 92.4%.

On the other hand, some argue that the US economy has not entered a recession phase and that the market is overreacting. Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said in an interview with CNBC that "although employment figures came in weaker than expected, it does not yet appear to be a recession." He added, "There are some warning signs such as rising household delinquency rates, but economic growth remains fairly stable." He suggested that market fears are exaggerated. Goolsbee also reassured the market by stating, "The Fed's mission is to maximize employment, stabilize prices, and maintain financial stability. If conditions worsen, we will address them."

Ed Yardeni, a veteran Wall Street investor and head of Yardeni Research, also assessed that "the labor market remains in good shape," and "the US economy is still growing, and the service sector is functioning well." He viewed the recent stock sell-off as related to the unwinding of the yen carry trade and suggested it is more likely a technical market deviation rather than a precursor to a recession.

US Service Sector Improvement Narrows New York Stock Market Losses

The US service sector also shifted to expansion territory for the first time in a month, partially easing recession concerns. The Institute for Supply Management (ISM) reported that the July non-manufacturing PMI was 51.4, matching expectations (51.4). A PMI below 50 indicates contraction, while above 50 indicates expansion. The July non-manufacturing PMI rose 2.6 points from the previous month’s 48.8, which was the lowest in about four years, signaling a return to expansion. Following the release of this service sector improvement indicator in the morning, the New York stock market narrowed its losses.

After an early sharp decline, US Treasury yields partially recovered, with the 2-year and 10-year notes moving in opposite directions near the flat line. The 2-year Treasury yield, sensitive to monetary policy, rose 2 basis points (1 bp = 0.01 percentage points) to 3.89%, while the 10-year Treasury yield, a global benchmark, edged down slightly to around 3.78%.

Among individual stocks, AI leader Nvidia fell 6.36%. Apple dropped 4.82% following news that Berkshire Hathaway, led by investment guru Warren Buffett, halved its Apple holdings. Alphabet, Google's parent company, declined 4.61% after a US court ruled it violated antitrust laws by paying smartphone manufacturers hundreds of billions of dollars to pre-install its apps. Tesla fell 4.23%.

The market is focusing on remarks from Fed officials and economic data scheduled for release this week. Trade balance figures will be released on the 6th, and new unemployment claims on the 8th. Speeches by Mary Daly, president of the San Francisco Fed, and Thomas Barkin, president of the Richmond Fed, are also planned this week.

Concerns about a Middle East war are intensifying as Iran is expected to retaliate against Israel, which is believed to be behind the assassination of Hamas leader, as early as the 5th.

International oil prices fell as recession fears in the US dominated investor sentiment over geopolitical instability in the Middle East. West Texas Intermediate (WTI) crude closed at $72.94 per barrel, down $0.58 (0.79%) from the previous day, while Brent crude, the global benchmark, ended at $76.30 per barrel, down $0.51 (0.66%).