With the latest US jobs data released today pointing to a weakening US economy, there’s clearly much more being read into this data than just stockmarket moves. These data are having clear implications for the next Fed decision and the all-important direction of US interest rates as well as the magnitude of any possible cuts.
There has been heady speculation for some weeks that the Fed was likely to cut rates at it’s next meeting on 17/18 September, rather than leave it until closer to the Presidential election when political implications would be more of an issue.
Investment strategists have been sharing their reaction to today’s US jobs data, including their assessment of what it means for the economy and the direction of US interest rates as follows:
Garry White, Chief Investment Commentator at Charles Stanley, provides some reassurance that the US economy isn’t ‘one falling off a cliff’ as he says : “The Federal Reserve US non-farms payrolls data reflects a slowing economy – but not one falling off a cliff. This should please the Federal Reserve after markets had a recession-fear spasm at the start of August. Hours are not being cut and there are no mass layoff of existing staff.
“The slightly weaker-than-expected figure – and the fact that previous months’ data has been revised lower – won’t necessarily help the market get clarity on the size of the US rate cut expected at its mid-September meeting. The market is pushing for a 50-basis-point (bp) cut, but this seems overly optimistic. More than 100bp of cuts is priced into future markets by the end of the year.
“With only three meetings between now and 2025, that would require at least one ‘jumbo’ 0.5% rate cut. Mr Powell needs to start managing expectations on this front soon to head off any disappointment in a slower easing cycle.”
Tiffany Wilding, Managing Director & Economist at PIMCO has also been sharing her reaction to these data saying: “August payroll growth rebounded, but the turnaround was more modest than expected and revisions to the prior two months reduced job gains by 89K. Incorporating the August data, the revisions brought down the 3-month moving average for payrolls gains to 116K versus 170K in the previous month. The unemployment rate, meanwhile, ticked down 0.1 percentage point on a rounded basis, helping to reverse the rise in in the previous month, while wage inflation (average hourly earnings) reaccelerated 0.4% month-over-month, bringing the year-over-year rate back up to 3.8% vs 3.6% in the previous month.
“Overall, today’s report is very consistent with an economy that is slowing but not crashing. Slower payroll growth makes sense in the context of an economy that is getting back to normal after the unique set of economic shocks in recent years, including a surge in immigration. Immigration flows have kept job and labor supply growth strong. However, with more moderate immigration flows this year, labor market momentum is cooling.
“In term of implications for the Federal Reserve, we still think policy makers are most likely to kick off the cutting cycle with a 25 basis point cut in September. However, that doesn’t change the fact that the policy rate is elevated, despite the normalization in economic conditions. Regardless of the size of the September cut, we think Federal Open Market Committee officials will signal through updated projections that they plan to return policy to more normal levels much faster than previously thought, perhaps getting there by end of 2025.”
Richard Carter, head of fixed interest research at Quilter Cheviot said: “Today’s US jobs data is expected to determine the size and pace of the highly anticipated Federal Reserve rate cuts, and with the increase in nonfarm payrolls coming in worse than feared at 142,000, we will no doubt see increased speculation that the Fed will take decisive action with a 50bps cut on the 18th of September.
“Alongside this disappointing August figure, July’s nonfarm payrolls number was also revised down from 114,000 to just 89,000. Meanwhile, the unemployment rate fell slightly to 4.2% following a rise to 4.3% in July, and wage growth came in at 3.8% on an annual basis, up 0.2% compared to 3.6% reported last month.
“Markets have been pricing in significant cuts before year end, with many economists touting more than 1%, and today’s labour market print could exacerbate this further. As was the case last month, this data release has proven notably weaker than had been hoped, suggesting the economy may be weakening more than is consistent with the Fed’s aim of a soft landing.
“When considered alongside signs of softening elsewhere in the economy, today’s worse than expected jobs data will all but guarantee a shift in the Federal Reserve’s stance. The Fed’s decision making is highly data sensitive, and with many datapoints continuously suggesting a slowing economy, it seems inevitable that we will see the first cut confirmed this month.”
Andrew Summers, Chief Investment Officer at Omnis Investments, comments on the unemployment figures saying:
“A bounce back, following a weak report in August. Not a total surprise, given the summer months tend to be more volatile and changeable. Our base case remains a 25bps cut from the FOMC at the next meeting. However, the labour market trend is pretty clear to us. We expect the softening to continue between now and the end of the year and therefore fixed income to be well supported. This dataset may see a bounce in equity markets after a period of being under pressure.”
Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley), is also of the mind that these data point to action from the Fed later this month saying:
“Taken at face value, the latest US employment number is quite weak, undershooting market consensus this time round after last month’s figures were revised down also. At the same time though, August job creation came above July’s number and the unemployment rate declined again.
“The US jobs numbers are important for investors as weak data last month triggered the market sell-off.
“However, this was amplified by technical factors, such as thin market liquidity, the buyback blackout during the earnings season, and the unwind of ‘crowded’ trades by leveraged investors. Sure enough, we saw a sharp bounce back.
“To be clear, US job creation is moderating, though its pace doesn’t point to a recessionary environment.
“The read-across for monetary policy is clear. With inflation now tamed, the Fed can focus on jobs. It wants to engineer a ‘soft landing’ which means slower but positive growth. Today’s report raises the probability that the Fed might consider a quarter-point rate cut this month, even though the bar remains somewhat high to consider it a done deal.
“Apart from deep recessions and bubble bursts, equity performance 12 months after the first cut tends to be positive. These rate cuts lower the discount factor and boost valuations. The effect is positive because the Fed, in these scenarios, mainly cuts as inflation is lower, not as growth is weak.
“We are therefore positioned with a slight equity overweight and prefer short-dated government bonds.
“To partially mitigate possible drawdowns in a volatile period, we also maintain our ‘equity insurance’ in our flagship funds, which is an instrument that appreciates in value when markets fall.”
Daniela Sabin Hathorn, senior market analyst at Capital.com said: “US stocks are struggling to pick a direction after the US August jobs report. The reading gave a mixed picture of the health of the labour market, with another month of weaker job growth than anticipated, but an unexpected rise in wages.
“Average hourly earnings rose 0.4% in August despite a downward revision which saw wages contract 0.1% in July. On a yearly basis, wages came in at 3.8%, a rise from 3.6% in the previous month and above expectations of 3.7%.
“This means the data is slightly inconclusive as to whether it pushes the Federal Reserve to take stronger actions when it starts cutting – supposedly – in September. Interestingly, despite the higher wage data, a factor the Fed has pointed out in the past as a sticky area of inflationary pressures, markets are pricing in a higher chance of a 50bps cut this month that before the data release. The current pricing shows a 57/43 split in favour of 50bps, versus 59/41 in favour of 25bps before the jobs data came out. The softer headline NFP data may be the main reason behind this sense of confidence in the Fed’s desire to cut rates aggressively.
“The next key event on the calendar before the FOMC meeting on the 19th will be the US CPI data for august, released on Wednesday next week. Forecast show an expected drop to what would be the lowest level since April 2021 if confirmed. If so, then we could see pricing of a 50bps become more aggressive, giving risk appetite a boost, and weighing on the dollar and yields.
“For now, traders seem a little lost for direction, with the S&P 500 seeing a small boost following the data, but unable to break the pattern of descending highs seen over the past few sessions.”
