After weaker than expected US employment data in recent weeks, along with comments made by Governor Powell at the recent Jackson Hole Economic Symposium, eyes were firmly focussed on non-farm payroll data. Whilst August was a better month than July in terms of number of jobs added, it came in below the consensus forecast, at 142k jobs added versus the 160k expectation. Debate continues to rumble here. Some commentators point to a slowing economy as the reason behind the recent lower numbers. Others meanwhile point to the increase in participants in the labour force, partly due to the increase in immigration. Also of note were meaningful downward revisions to May and June figures.

Staying with the economic narrative, survey data released this week from ISM continued to show a two pace economy. The service sector continues to show signs of expansion. New orders were particularly strong here. A very different picture is seen in the manufacturing sector, where survey data continues to show a state of contraction, although there was a slight improvement from the previous month. Contraction has now been posted for the last 5 months. New orders were particularly weak this time around.

The debate is now rumbling as to whether or by how much the US Federal Reserve is behind the curve now in terms of making interest rate cuts, with monetary policy having been kept tight for too long. Again, only time will tell. The market appears more convinced that rate cuts are now coming, three or potentially four before year end.

As a consequence, after the longest period on record, we have seen the US 10 year-2 year yield curve dis-invert, whereby the yield on the latter is now lower than the former. Although we would add only just. From an economic perspective, some commentators believe this is important, others not so much. Whilst it does not cause a recession there are those who believe that one could be seen in the not too distant future. As the yield curve normalises, whereby yields at the short end are lower than those at the long end of the yield curve, historically this has coincided with an economic recession. In the US, the last 6 times this has happened, a recession has subsequently been seen. Longer term the relationship between the two occurrences is not as strong, and there have been occasions then the yield curve has normalised and a recession has not been seen. Which will prove to be the case this time around?

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