Data Revision Shows More Cracks in Labor Market

Rates fall on nonfarm payrolls revision. The short end of the swap curve closed 4-6bps lower today after a downward revision to nonfarm payrolls extended this morning’s rate decline. Generally dovish FOMC minutes contributed as well ahead of Chair Powell’s press conference on Friday. The move extended yesterday’s price action, where rates fell 6-8bps across the curve. Fed Funds futures currently have 34bps of rate cuts priced in for September’s FOMC meeting, as a 25bp move is effectively locked in.

Nonfarm payrolls marked down by largest amount in over a decade. According to preliminary data from the Bureau of Labor Statistics, nonfarm payrolls will be revised lower by 818k for the year that ended March 2024 (~68k per month). That is the highest downward revision since 2009 and yet another signal that the labor market is deteriorating. The revision is especially crucial after July labor figures showed rising unemployment (4.3%) and a slower pace of hiring (114k jobs added vs. 206k previously).

FOMC minutes support market expectations of a September rate cut. The July FOMC meeting minutes indicated that a rate cut is likely to occur in September. Though the Fed held rates steady in July, the minutes stated that “several” voters believed data provided “a plausible case for reducing the target range 25 bps” at that meeting, or “that they could have supported such a decision.” Looking ahead, the minutes also stated that the “vast majority” of voters think a rate cut would likely be appropriate at the next meeting if data continues to come in about as expected. The minutes also highlighted the Fed’s renewed focus on labor market risks, stating that some voters “noted the risk that a further gradual easing in labor market conditions could transition to a more serious deterioration.”