Rate Cut Countdown: Will Friday’s Jobs Report Seal the Deal?

San Francisco Fed President Mary Daly stated on Wednesday that the Federal Reserve needs to lower interest rates to maintain a strong labor market. However, the extent of the rate cuts will depend on the incoming economic data.

Weak employment indicators

The background of this speech is that the Federal Reserve's favorite employment indicator JOLTS has exploded, and expectations for the Federal Reserve to cut interest rates by 50 basis points in September have once again heated up. Data released on Wednesday showed that the number of JOLTS job vacancies in July was 7.673 million, falling to the lowest level since early 2021, significantly lower than the expected 8.1 million. The previous value was revised down from 8.184 million to 7.91 million. LOLTS job openings are a labor market statistic closely watched by the Federal Reserve.

According to the CME, the probability of a 50bps cut jumped to 50% after the JOLTS report was released, then fell back to 45%, from 38% the day before. Meanwhile, the probability of a 25bps rate cut fell to 55% from 62% the day before.

25 or 50bps, will the non-farm payrolls finalise it on Friday?

On the previous day, the two major ISM manufacturing data also pointed to recession and stagflation. Concerns about a hard landing are growing. The market has entered the "bad data is bad news" mode. Stock markets continue to fall, and funds are pouring into the bond market again.

The 10-year U.S. Treasury yield fell for the second consecutive day, falling to 3.75%, the lowest level so far this year and the lowest level since July last year.

After the release of the JOLTS data, Citi analysts Andrew Hollenhorst and Gisela Hoxha said in a report that the U.S. job market is on the verge of a more sharp weakening:

Although the lower layoff rate in July shows that the labor market has not deteriorated sharply, the trend of fewer job vacancies and lower hiring rates, while the unemployment rate has steadily risen, shows that the job market is on the verge of a more sharp weakening. It is expected that job vacancies will continue to decline in the coming months and the unemployment rate will rise faster.

Citi believes that if Friday's employment report confirms that the labor market is weakening, the Federal Reserve is expected to cut interest rates by 50 points in September and cut interest rates by another 50 basis points in November. #NonFarmPayroll #JOLTS #Economic #Investment