Two separate data releases highlighted signs of softening in the economy on Thursday as the Federal Reserve mulls over when to cut interest rates.

Weekly jobless claims once again rose more than expected last week in the latest sign of a cooling labor market. New data from the Department of Labor showed 249,000 initial jobless claims were filed in the week ending July 27, up from 235,000 the week prior and the highest level since August 2023.

Meanwhile, the latest reading on activity in US manufacturing showed the sector sank further into contraction during July. The ISM's manufacturing PMI registered a reading of 46.8 in July, down from June reading of 48.5 and the lowest reading since November 2023.

“Demand remains subdued, as companies show an unwillingness to invest in capital and inventory due to current federal monetary policy and other conditions," Chair of the Institute for Supply Management Timothy Fiore said in a press release.

The weaker-than-expected economic data sent the 10-year Treasury yield (^TNX) down about 12 basis points to 3.98%. This marked the first time the 10-year yield has fallen below 4% since February. Meanwhile, all three of the major stock indexes turned lower.

"The ongoing deterioration in the economic data as evidenced by today’s rising initial jobless claims, low unit labor costs, and abrupt slowing in global manufacturing activity suggest that we are getting to a point where bad economic news is bad for markets," Renaissance Macro's head of economics research Neil Dutta wrote in a note on Thursday. "Until the Fed begins cutting, they are going to look behind the curve. In my view, the upshot is that this is a small policy mistake that can be undone very quickly."

The data comes less than 24 hours after the Fed held interest rates steady at the conclusion of its latest policy meeting. Chair Jerome Powell noted the central bank is still seeking further confidence in inflation's path lower but also acknowledged a September interest rate cut is "could be on the table."

Powell noted the Fed is now more attentive to not only the risk of inflation not falling, but also the risk of unemployment continuing to tick higher. For now, Powell said the Fed still believes the labor market is in the process of a "gradual normalization."

"If we start to see something that looks to be more than that, then we're well positioned to respond," Powell said.

The concern among economists remains that there are already signs of slowing in the labor market that warrant a closer look from the Fed. In Thursday's ISM report, the employment index tumbled to a reading of 43.4 in July, down from 49.3 in June.

Capital Economics North America economist Thomas Ryan wrote in a note on Thursday that the decline in the employment index will likely "raise some eyebrows." He added, "it suggests there is a risk that the labour market softens beyond the normalisation we have already seen."

Jefferies US Economist Thomas Simons noted that the rate cuts could help the sagging manufacturing sector but "it is looking more and more like it's going to take more than a handful of 25 basis point moves."

Investors appeared to agree with Simons, as markets are now pricing in a 20% chance of a 50 basis point interest rate cut in September, nearly double the odds seen just a day prior, per the CME FedWatch Tool.

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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