US August NFP: The 50bps Rate Cut Question
Friday’s US Non-Farm Payroll figures come out at a crucial moment for the markets. Traditionally, September is a bad month for risk appetite, and already the start has shown an inclination for the downside. While that might be good for gold (and other safe haven) investors, traders in more risk-prone currencies would naturally be nervous.
On the other hand, a good NFP print could help reassure markets, and there could be a resumption of the upside. But, there are several moving parts to the data, and a mere beat of expectations is not enough to ensure traders take a positive view of the data. Where markets go after Friday is going to depend on a couple of key factors.
To 50bps or Not to 50bps
The markets are universally agreed on the Fed cutting rates later in September. What isn’t agreed on is just how much. By the end of August, there was a solid majority saying it would only be 25bps. But after Tuesday’s market drop, odds have shifted substantially towards even that there will be a “double” rate cut. And the labor data is crucial in figuring out which option will likely win out.
This is because the analysts and traders who believe a 50bps rate cut is the likely outcome argue that the Fed has “pivoted” away from worrying about inflation and is now worried about the labor market. The Fed has a second mandate to maintain full employment, and the unemployment rate has been ticking up. If inflation is heading towards target, then the Fed would presumably want to ease soon so they aren’t held responsible for an uptick in unemployment – and subsequent slowing of the economy.
What the Data Could Say
If the labor market shows resilience, particularly if it remains “tight”, then the Fed can keep its focus on inflation and not cut as much. But if the number of new jobs keeps slowing, and the unemployment rises, and wages are slowing down, all of that indicates that the labor market is getting “loose”. In which case, the Fed would be more likely to cut.
The consensus is that US Non-Farm Payrolls will come in at 120K, which is marginally higher than the surprisingly lower 114K reported last time. This would likely be interpreted as a sign the labor market was slowing down, and possibly that there is a pending recession. Though it should be pointed out that jobs numbers typically are a lagging indicator, meaning they don’t show a change in the economic situation until after it has already happened.
Where the Sweet Spot Lies
The issue is that if the jobs numbers come in too high, then the Fed is likely to cut only 25bps or even not at all. Which would also hurt markets, because that would mean higher rates would last for longer. That might be something over 180K, since that’s usually seen as the bottom end of a “normal” NFP report.
The other data will be closely followed too. The unemployment rate is expected to remain unchanged at 4.3%, and average hourly earnings are also seen unchanged at 3.6%. Additionally, the figures from the prior month are often revised, which could change the outlook if there is a major correction to July’s shocking numbers.
