04:42 PM EDT, 08/02/2024 (MT Newswires) -- Just two days after it hit a record high above 23,000, the Toronto Stock Exchange's S&P/TSX Composite Index lost another 495.58 points, or more than 2.1%, on Friday, adding to the near 380 points lost a day earlier, to stand at 22,227.63 going in to a long holiday weekend as stock markets plunged worldwide on worries the U.S. economy is heading to a recession.

after Asian markets plunged overnight, U.S. and European stock markets also fell sharply after the U.S. Bureau of Labor Statistics reported the United States added Just 114,000 jobs last month, well under expectations for a rise of 185,000, according to Marketwatch and pushing the unemployment rate up to 4.3% from 4.1%. Since the U.S. is Canada's largest trading partner, such a threat weighs on the sentiment of Canadians.

That was reflected in the sectors. Not surprisingly most were lower, led by Energy on lower oil prices. But there appear to have been gains for the Telecoms and Utilities sectors.

The tech--heavy Nasdaq market closed down 2.4%, while the S&P 500 index lost 2% of its value. Plunging commodity prices also weighed on the resources-heavy TSX.

In commodities today, West Texas Intermediate crude oil fell for a second-straight session, tumbling to a two-month low on concerns demand from major importers and the U.S. is slowing and a flight from risk amid weakening equities. WTI crude for September delivery closed down $2.79 to settle at US$73.52 per barrel, the lowest since June 5, while October Brent crude, the global benchmark, closed down US$2.71 to US$76.81.

Gold moved down by late afternoon even as the dollar and treasury yields tumbled after the U.S. jobs data. Gold for December delivery was last seen down US$2.10 to US$2,478.70 per ounce, after earlier touching a record US$2,522.50.

"We rudely interrupt your regular summer programming, and the Olympics, to bring you tidings from the economy: It's suddenly slowing," BMO Economist Douglas Porter said in a note.

Porter said while much of this week's focus was on the mid-week FOMC meeting, the two big U.S. economic reports for July proved to be "notably clunky". He noted a "surprisingly soft" manufacturing ISM at 46.8 sent a warning signal, and then payrolls rose by a modest 114,000, replete with downward revisions to earlier months, and another back-up in the jobless rate.

The rise in the unemployment rate to 4.3%, up 0.8 ppts from a year ago, and has met the so-called Sahm Rule. which refers to an indicator that signals the early stages of a recession, to one decimal place. Behind that soft result, Porter noted, the companion household survey reported only 57,000 more Americans have jobs now than a year ago, a growth rate of 0.04%. "That's a pace that has typically preceded downturns, and hints that even the sluggish payroll readings may be overstating the economy's strength," Porter added.

Meanwhile, Rosenberg Research said there was "absolutely no silver lining or redeeming feature" in today's non-farm payroll report. "The Fed," it added, "is behind the economic curve to the same degree it was behind the inflation curve back in 2021 and 2022, and there will be hell to pay for this policy misstep -- especially given the tense political environment with an election just three months away."

Elsewhere, David Doyle, head of economics at Macquarie, noted July's employment report was the second consecutive "soft reading" for the labor market. He noted headline payrolls growth sharply decelerated and the composition of gains weakened further. The private sector ex-healthcare trend has slowed back to the pace that prevailed in the second half of 2023.

Doyle noted the unemployment rate moved higher for the fourth consecutive month to 4.3% and now "well exceeds" the median participant estimate at the Fed's June meeting. The report, he said, is likely to result in the FOMC placing even greater weight on the labor market when considering the timing and pace of rate cuts, something it made clear was already becoming the case at the July meeting.

Macquarie continues to expect a 25 bps rate cut in September. While the data in coming months will shape the policy trajectory, labor market softening suggests an increased probability that the Fed may cut at successive meetings through year-end, Doyle said.

However, the CME Fedwatch tool is now showing a 71.5% probability the Fed will be forced to make a 50 basis point cut to interest rates at its next meeting on Sept.18, up from 22% a day earlier.

For its part, Oxford Economics said its cross asset sentiment indicator is sending a risk-off signal following this week's market gyrations. It thinks we could see further equity market weakness in the near term, led by the large-cap tech sector, as investor expectations are reset. However, Oxford Economics also thinks fears of a US recession are overdone and believe the start of the Fed's easing cycle will help equities find their footing. We continue to think small-cap stocks are best placed in this environment.