Following the release of the U.S. employment statistics for August 2024, concerns about a potential U.S. recession intensified, casting a shadow of uncertainty over U.S. equity markets. This shift was primarily driven by employment growth missing market expectations, the continued triggering of the “Sahm Rule” recession indicator, and the rapid unwinding of the “yen carry trade” following a rate hike by the Bank of Japan.

August Employment Statistics Indicating a Cooling Labor Market

The U.S. employment statistics released in early September 2024 revealed that non-farm payrolls increased by 142,000 in August, falling short of the market estimate of 165,000. Crucially, the data for June and July were also downwardly revised by a combined 86,000, making it clear that the underlying trend of employment growth is losing momentum. While the unemployment rate in the United States edged down slightly to 4.2% from July’s 4.3%, a critical recession indicator known as the “Sahm Rule” remained active. This rule is triggered when the three-month moving average of the unemployment rate rises 0.5 percentage points above its lowest point in the past 12 months. Currently, the indicator stands at 0.57%, a level that has historically preceded almost every major U.S. recession, significantly heightening investor anxiety.

Divergent Interpretations of Recession Indicators

Despite the Sahm Rule’s warning, economists are debating whether this signal accurately reflects a looming deep recession or is being skewed by temporary factors. In July 2024, Hurricane Beryl struck the southern United States, leading to a temporary surge in workers being unable to work due to bad weather, which may have artificially inflated the unemployment figures for that period. Furthermore, a significant increase in the labor supply—driven in part by a surge in immigration—has contributed to the rising unemployment rate even as the overall demand for labor remains relatively healthy. Notably, the employment rate for prime-age workers (those aged 25 to 54) in the U.S. remains at a high level of 80.9%, and the Atlanta Fed’s GDPNow model recently projected Q3 2024 real GDP growth at a solid 2.50%. These data points suggest that while the U.S. economy is cooling, it may not be on the verge of a total collapse as initially feared by the markets.

Financial Market Turmoil and Shifting Asset Structures

Impact of the Yen Carry Trade Unwinding

A major catalyst for the recent weakness in U.S. stocks has been the dramatic “unwinding” of the yen carry trade, triggered by shifting monetary policies in Japan. On July 31, 2024, the Bank of Japan (BOJ) raised its policy interest rate to 0.25%, surprising global markets with its hawkish stance. For years, investors had borrowed the low-interest Japanese yen to fund investments in high-growth U.S. technology stocks. However, the combination of a Japanese rate hike and the anticipation of U.S. Federal Reserve (Fed) rate cuts caused a sharp appreciation of the yen, forcing these investors to sell their U.S. assets to repay their yen-denominated debts. This massive sell-off hit “Magnificent Seven” giants like NVIDIA and Apple particularly hard, leading to a significant correction in the Nasdaq and S&P 500. During this turmoil, the VIX index—a measure of market volatility often called the “fear gauge”—surpassed the 50 mark, its highest level since the COVID-19 crisis in March 2020. Please refer to the figure below.

Risk-off Sentiment and Sector Rotation in Global Markets

As market volatility spiked, global investors shifted into a “risk-off” mode, seeking the safety of U.S. Treasuries. This surge in demand pushed the 10-year U.S. Treasury yield below 3.7% in early August 2024, its lowest point in more than a year. Within the equity market, a notable “rotation” has also begun to take shape. As interest rates decline, capital is moving away from high-growth tech stocks and toward small-cap stocks—represented by the Russell 2000 index—which are more sensitive to borrowing costs, as well as defensive sectors with high dividend yields that tend to hold up better during economic slowdowns. Goldman Sachs Asset Management suggests that the era of U.S. equity dominance may be reaching a turning point, advising investors to revisit diversified strategies that include undervalued European equities and a focus on total shareholder yield.

Future Focal Points: Fed Policy and the Economic Outlook

The Debate Over Rate Cut Magnitude at the September FOMC Meeting

The primary focus for the U.S. market is now the Federal Open Market Committee (FOMC) meeting scheduled for September 17–18, 2024. Following the weak employment statistics, a rate cut in September is now considered a virtual certainty by market participants. The current debate centers on the scale of the reduction: whether the Fed will opt for a standard 25 basis point (bp) cut or a more aggressive 50 bp cut to proactively prevent a deeper economic downturn. Fed Chairman Jerome Powell stated at the Jackson Hole symposium that “the time has come for policy to adjust,” signaling a pivot toward supporting the labor market. Analysts at Goldman Sachs Global Investment Research (GIR) forecast three consecutive 25 bp cuts in September, November, and December, resulting in a total 0.75% reduction in interest rates by the end of 2024. Please refer to the figure below.

Soft Landing Feasibility and U.S. Election Impact

The medium-to-long-term outlook depends on whether the U.S. economy can achieve a “soft landing”—bringing inflation back to target levels without triggering a recession. There are signs of resilience: the ISM Services PMI rose to 51.4 in July, indicating that the service sector continues to expand, and U.S. retail sales grew at a much stronger-than-expected rate of 1.0% in July. However, political uncertainty ahead of the November 2024 U.S. Presidential Election remains a major headwind. With Vice President Kamala Harris and former President Donald Trump in a tight race, concerns over future trade, tax, and diplomatic policies have led many investors to adopt a cautious stance, often pulling back from the market heading into weekends. Moving forward, investors will be scrutinizing not only employment data but also U.S. retail sales and inflation indicators to determine if the Federal Reserve can successfully navigate the economy away from a hard landing.

Reference Pages

• 【U.S. Bureau of Labor Statistics】https://www.bls.gov/

• 【Federal Reserve Board】https://www.federalreserve.gov/

• 【Bank of Japan】https://www.boj.or.jp/en/

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