Global Markets React to U.S. Unemployment Report and Japanese Interest Rate Hike

On Friday, August 2, the U.S. Department of Labor released its July unemployment report, revealing an increase in the unemployment rate to 4.3% from 4.1% in June. The report also noted the addition of 114,000 new jobs, falling short of the expected 175,000. Hiring has mostly stalled in the manufacturing, retail sales, and leisure and hospitality industries.

Source: U.S. Department of Labor - The Employment Situation - July 2024

Earlier in the week, the Bank of Japan decided to increase the interest rate from 0%-0.1% to 0.25%. This decision followed the release of July inflation data, which showed an increase in Tokyo’s core CPI from 2.1% in June to 2.2% in July. The higher interest rate has strengthened the Yen against the USD, causing the Yen/USD exchange rate to rise by 11.3% since the beginning of July. This positive trend has led to the unwinding of the popular carry trade strategy, where investors borrow Yen to invest in higher-yielding assets.

The combination of worse-than-expected U.S. unemployment data and the Japanese interest rate hike caused significant concern in the Asian markets on Friday, as investors feared these could be early indicators of a weakening U.S. economy. This anxiety triggered a mass sell-off in markets worldwide, leading to substantial declines from Friday to Monday. The Japanese Nikkei 250 Index dropped by 16.09%, Taiwan Semiconductor Manufacturing Co Ltd’s stock fell by 11.22%, the Blue Chips Stoxx Europe 600 declined by 4.84%, the S&P 500 hit its lowest level since May, decreasing by 4.76%, and the Nasdaq index lost 5.78%.

Oil and cryptocurrency markets have also been significantly affected by recent events. Oil prices lost all the gains made this year, while cryptocurrencies experienced substantial declines, with Bitcoin losing 17.77% over two days. However, by Tuesday, Bitcoin began to recover, increasing by 4.45%, hinting at a potential stabilization in the cryptocurrency market.

Market volatility in the past few days has been exceptionally high, as indicated by the VIX index, which measures expected volatility in the U.S. stock market. On Friday, the VIX index increased to 29 points, reaching its highest point since the regional banking crisis in the U.S. in March 2023. By Monday, it surged to 65 points before falling to 33 and further decreasing on Tuesday morning. The subsequent decline in the index indicates a gradual return to stability in the markets.

VIX Index: Relative Strength Indicator (Source: Bloomberg) August 6, 2024

By Tuesday, this reduction in volatility led to rebounds in various indices. The Nikkei 250 increased by 9.6%, Taiwan Semiconductor Manufacturing rebounded by 7.98%, and the Stoxx Europe 600 rose by 2.85%. The S&P 500 also showed signs of stabilization, increasing by 0.6%.

Despite the recent market turmoil, the Federal Reserve has not taken any immediate action, likely to avoid causing further panic. However, futures traders are now anticipating a more than 1% point decrease in U.S. interest rates, compared to the previously expected 0.75% point decrease before the unemployment report was released.