In a recent note to clients, analysts at Jefferies have highlighted a significant shift in the US labor market, indicating a possible rate cut by the Federal Reserve before the regular September meeting. The analysts pointed out that recent data has provided "unambiguous evidence of a weakening in the US labor market at a time when inflation is still above the Federal Reserve's 2% target."

According to the labor market report for July, there was a meager increase of just 114,000 nonfarm payrolls, marking the second-lowest figure since December 2020. Jefferies notes that the government and healthcare sectors accounted for a significant 71% of this growth. However, when excluding the net birth-death model adjustment, nonfarm payrolls actually declined by 1.16 million on a non-seasonally adjusted basis.

The weakening trend was further evident in the household survey, which showed a month-over-month rise of only 67,000 in total employment for July. This represents the lowest rate of growth since August 2010, with year-over-year growth at a mere 57,000. The unemployment rate has also climbed to 4.3%, reaching its highest level since October 2021.

Notably, wage growth has been decelerating as well, with average hourly earnings slowing from 3.8% in June to 3.6% in July. Additionally, the quarterly employment cost index, a key measure of wage pressures, slipped to 4.1% year-over-year in Q2 2024, down from the previous quarter's 4.2%.

Jefferies suggests that these indicators have led money markets to anticipate a rate cut, with expectations of easing increasing from 86 to 116 basis points by year-end. In fact, Jefferies believes that an intra-meeting cut, the first since March 2020, now appears likely.

While interest rate cuts may not have an immediate positive impact on US equities, Jefferies predicts that they will benefit Asian and emerging market stocks. As US interest rates fall and the value of the dollar weakens, central banks in these regions will have more room to implement domestic easing measures, potentially stimulating market growth.

The weakening US labor market and the anticipation of a rate cut by the Federal Reserve have raised concerns about the overall state of the economy. Investors and market participants will closely monitor upcoming economic indicators and the decisions made by the Federal Reserve in the coming weeks to gauge the future direction of financial markets.