Dow Jones fumbles on Thursday but recovers some footing

The Dow Jones backslid 400 points on Thursday as economic concerns persist.
Investors are growing increasingly worried about a recession as hiring slows.
Friday’s NFP jobs data dump looms over the horizon as investors begin to stress.

The Dow Jones Industrial Average (DJIA) ground 400 points lower on Thursday, shedding weight for the second time this week after US jobs data came in below expectations. Equities have since recovered from the day’s initial shock sell-off, but the Dow Jones is struggling to return to flat for the day. ADP Employment Change showed its slowest rate of job additions since February of 2021, sparking a fresh round of risk aversion as investors grapple with the threat of a possible recession in the US economy.

According to payroll processor ADP, the US added 99K net new jobs in August, down from July’s revised 111K and well below the expected 145K. August’s ADP additions are the lowest print since early 2021, sparking a fresh round of risk aversion and reigniting investor concerns that the US could be heading into a recession.

The ADP jobs report serves as a bellwether for what markets can expect from Friday’s upcoming US Nonfarm Payrolls (NFP) report, albeit one with a wobbly track record for accuracy. August’s NFP print represents the last significant labor update before the Federal Reserve’s (Fed) upcoming rate call on September 18, when Fed policymakers are broadly expected to kick off a rate-cutting cycle.

According to the CME, rate markets are currently betting on 40% odds that the Fed will blow the doors open with a 50 bps cut later in the month. The remaining 60% are betting on a more demure 25 bps opening rate trim. Investors are anticipating using this Friday’s NFP print as a way to gauge the depth of the Fed’s first rate cut since the Fed slashed 100 bps in March of 2020.

Economic Indicator

ADP Employment Change

The ADP Employment Change is a gauge of employment in the private sector released by the largest payroll processor in the US, Automatic Data Processing Inc. It measures the change in the number of people privately employed in the US. Generally speaking, a rise in the indicator has positive implications for consumer spending and is stimulative of economic growth. So a high reading is traditionally seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

Traders often consider employment figures from ADP, America’s largest payrolls provider, report as the harbinger of the Bureau of Labor Statistics release on Nonfarm Payrolls (usually published two days later), because of the correlation between the two. The overlaying of both series is quite high, but on individual months, the discrepancy can be substantial. Another reason FX traders follow this report is the same as with the NFP – a persistent vigorous growth in employment figures increases inflationary pressures, and with it, the likelihood that the Fed will raise interest rates. Actual figures beating consensus tend to be USD bullish.

Dow Jones news

The Dow Jones plunged around 400 points on Thursday before recovering to a more modest 150 point decline. Despite a broad-based recovery bid, the DJIA was still tilted heavily toward the bearish side with all but five of the equity index’s constituent securities testing into the red. Merck & Co (MRK) managed to squeeze out a 3.3% gain despite Thursday’s bearish overtones, rising to $119.60 per share, while biotech firm Amgen (AMGN) declined 1.6% to $325.28 per share as traders take a breather from bidding up the medical tech firm, which is still up over 28% for the past year.

Elsewhere on the Dow Jones, Verizon (VZ) stumbled after stockholders reacted poorly to the news that VZ will be forking over $20 billion to acquire Frontier Communications (FYBR).

Dow Jones price forecast

Despite a fresh intraday test into the low end, the Dow Jones continues to play in a technical range just south of the 41,000 handle. The DJIA is still trading on the south side of recent all-time highs above 41,500, but the odds of an extended bearish pullback are draining out of the index as bidders continue to challenge downside momentum.

The long-term trend still clearly favors the high side, and even a determined push from collecting short positions will run into trouble at the 50-day Exponential Moving Average (EMA) rising through 40,300.

Dow Jones daily chart

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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