US benchmark 10-year yield plummeted overnight, breaking below 4% mark for the first time since February, signaling heightened investor anxiety. This sharp decline came amidst a broad market sell-off, with DOW dropping nearly -500 points, or -1.21%, and even the small-cap Russell 2000 index plunging -3%.
The rise in initial jobless claims to their highest level since August last year contributed to the risk-off sentiment. However, the more pressing concern for investors was the dismal ISM manufacturing report, with PMI falling deeper into contraction, and production and employment falling to their lowest levels since mid-2020.
The market’s reaction to these reports has shifted expectations towards more aggressive monetary easing. Investors are now starting to bet on a 50bps rate cut by Fed in September, with the probability of such a cut now around 30%. However, rather than cheering the potential for fast monetary easing, investors seem more concerned about a looming recession.
This development heightens the importance of today’s non-farm payroll report. Headline jobs are expected to grow by 176k in July, with the unemployment rate remaining unchanged at 4.1%. Meanwhile, average hourly earnings are anticipated to grow by 0.3% month-over-month.
Given the current sentiment, markets may react more strongly to any significant miss in the headline job growth number, which could signal a worse-than-expected slowdown in the employment market. In comparison, the unemployment rate and wage growth, which are more indicative of inflationary pressure, might take a back seat.
Technically, 10-year yield’s (TNX) strong break of near term falling channel indicates downside acceleration. More importantly, the bearish case is strengthening that fall from 4.737 is the third leg of the pattern from 4.997 top. Near term outlook will stay bearish as long as 4.292 resistance holds. Next target is 3.785 low. Break there will target 100% projection of 4.997 to 3.785 from 4.737 at 3.525.
As for Russell 2000, yesterday’s steep fall and breach of 2176.47 support suggests that a short term top is already in place at 2299.99. This came after just missing 61.8% projection of 1633.66 to 2135.45 from 1993.22 at 2303.32. Sustained break of 2176.47 would set the stage for deeper correction to 55 D EMA (now at 2116.13) and possibly further to 38.2% retracement of 1633.66 to 2299.99 at 2045.45.
China’s Caixin PMI services rises to 52.1, composite falls to 51.2
China’s Caixin PMI Services increased from 51.2 to 52.1 in July, surpassing the expected 51.4 and remaining in expansionary territory for the 19th consecutive month. Meanwhile, PMI Composite fell from 52.8 to 51.2, but still marking the ninth consecutive month of expansion.
Wang Zhe, Senior Economist at Caixin Insight Group, noted that while the services sector saw improvement, manufacturing faced greater pressure. “The former outperformed the latter in terms of supply, demand and employment,” Wang said. Despite this, composite prices remained weak, especially on the sales front, which further squeezed company profit margins. Market optimism improved, although it remained at a low level.
The latest data revealed that China’s real GDP growth in Q2 slowed to 4.7% yoy, significantly lower than market expectations. This slowdown suggests that it will be challenging for the country to meet its annual growth target of around 5%. Wang said the primary issues remain insufficient effective domestic demand and weak market optimism.
Full China Caixin PMI services release here.