Inline August nonfarm is bad news

Following the release of the August nonfarm figures, the US indices were down heavily on Friday and all ended up close to the low for the day. Expectations were for c160k and and the August nonfarms came in at 142k, a slight miss but much closer than the miss in the July figures. July nonfarm came in at 114k vs expectations of 185k, note that these figures were revised down to 89k yesterday.

Why was the Market spooked? Well a larger miss could actually have been seen as good news as it would have increased the likelihood of a 0.5% rate cut on 18 September. Consequently, the 'broadly inline' figure is likely to make the Markets more nervous and volatile over the coming 10 days. For us, the fact that the weak July nonfarm figures were revised down an additional 25k yesterday, the last few reports have all been revised down, probably gives more fuel for a 0.5% rate cut. Set against this, wage inflation in August was 0.4% and 3.8% for the year.

The VIX remains relatively high and is 22 at the time of writing - it hit 65 intraday on 5 August, its highest level since Covid in 2020. DJIA -1.01%, S&P 500 -1.73% and Nasdaq -2.55% (on the back of Mag7 -3.68%). On an equal weighted basis (our measure) the overall market was down -1.52%. Breadth was a weak 19% (vs 12% on 5 August and a high of the mid 80s% at the end of July) and daily volumes of 8b were light considering the Market move on the day (the average daily volume over the last year is 7.9b).

One day returns as follows - equal weight basis: Mag7 -3.68% (TSLA -8.5%, NVDA -4.1%, GOOGL -4%), large -1.29%, medium -1.53%, small -1.76% and micro -1.44%.

On a 1 and 2 week equal weight basis; Market -4.5% and -5%, Mag7 -5.5% and -6.9%, Large caps -3.4% and -3.0%, Medium cap -4.2% and -4.2%, small cap -5.0% and -5.2% and finally Micro cap -4.6% and -5.7%.

Our risk monitor remains in favour of the larger cap stocks. This performance differential in favour of large cap was magnified after the poor July nonfarm payroll figures and the associated wider Market retreat. Much of the adverse differential reversed in the middle of August. Interestingly the Small and Micro held up fairly well relative to Large on Friday following the August nonfarm figures.