US - Labour market grinds to a halt, September cut inevitable
Non-farm payrolls gained a mere 22k, well below consensus forecasts of 75k. The most hotly anticipated labour market report in at least a year released on time after a BLS statement flagging technical issues ahead of the release. Private payrolls gained 38k, supported by the usual education, health care and leisure sectors, while manufacturing lost 12k jobs, and federal government employment fell by 15k. The three month moving average dropped from 35k to 29k. Along with the weak job gains there was a decline in average weekly hours, another indication of weakening demand.
Various Fed officials have stated they currently prefer to look at rates rather than level changes, as ratios are less affected by difficulties with population estimates. The weak job gains, combined with an increase in the participation rate, led to an uptick in the unemployment rate to 4.3%, the highest since 2021, although by itself not alarming. Earlier this week JOLTS data showed a decline in the job openings rate, a steady hiring and quits rate, and an increasing layoff rate for July. Indeed data also showed a dip in openings in July but a recovery after. Compared to the pre-pandemic period, only the hiring rate is really suppressed.
Still, this report effectively makes a September cut inevitable. Markets immediately fully priced the remaining bps in, along with more rate cuts for the rest of the year. While we expect a hot CPI reading next week, we do not think it will sway the vote after this labour market report. A 25bps cut in September is therefore now our base case. We think it will be communicated as a recalibration towards neutral, and not as the start of a further easing cycle.
Further moves will be highly dependent on incoming data. Our view is one of significant pickup in inflation and a labour market that remains in a 'curious' balance, of weak demand, but also weak supply, with unemployment slowly ticking up further, but staying contained. In our primary scenario data in the coming months prevents further cuts until rotation on the Fed board leads to a more dovish tilt in the new year, when the easing cycle will be set in. For now our base case remains another 25 bps per quarter in 2026, with the upper bound standing at 3.25% at the end of the year.