#MacroFriday: Slowing US job creation opens door for rate cuts

MacroFriday is back after a long summer break! I hope your summer was less volatile than the financial markets in July and August. Unfortunately, we weren’t able to enjoy a peaceful beach vacation as the macroeconomic environment experienced some major shifts over the past few months.

Before the summer, US inflation was clearly on a disinflationary trajectory, and this trend continued through the summer. US consumer prices rose by just 0.15% over the last three months. Next week, we will get the August CPI release, which is expected to show the year-over-year change drop to 2.6%, moving closer to the Fed’s 2% inflation target and the lowest since March 2021. You can expect to read more on this subject in next week’s MacroFriday.

Today, we’re focusing on the US labor market. All eyes were on the August Non-Farm Payrolls release. Recent reports have shown a significant cooling in the US job market, with unemployment rising from 3.4% in April of last year to 4.3% in July. This raised concerns that the US labor market might be weakening, which led to declines in equity markets and interest rates. In his Jackson Hole speech, Jerome Powell made it clear that the Federal Reserve is closely monitoring developments in the job market. It seems the central bank’s focus is shifting from combating inflation to addressing the weakening job market.

Why is this data release so important, and what did it reveal? The strength of the US economy depends on the consumer. Despite rising prices in recent years, consumers have shown remarkable spending power. This economic strength relies on the job market and consumers’ perceptions of job security. Today’s data release reported that the US economy added 142,000 jobs in August, slightly below expectations but better than July’s revised figure of 89,000 jobs. The unemployment rate ticked down to 4.2%. While job growth in August was decent, the three-month moving average has been cooling and is below its long-term average. Markets have been paying close attention to this data, hoping to gauge the size of the rate cut the Fed will announce on September 18. Currently, market expectations are split between a 25 basis point or a 50 basis point cut. We view this data release as indicative of a 25 basis point cut, supported by the belief that starting with a 50 basis point cut might send the wrong signal to market participants. Next week’s US CPI report may provide additional insights. Regardless of the Fed’s decision in two weeks, its accompanying communication will be crucial.