Fed Cutting Bets Intensify After July Labor Data

Rates drop to 2024 lows on weak labor market data. Today’s nonfarm payrolls and unemployment rate data spurred greater concerns about the dwindling strength of the labor market. Rates plummeted 18-29bps across a steepening curve as markets speculated that the weaker labor market will force the Fed to cut rates substantially in 2024. As of market close today, Fed Funds futures have ~116bps of rate cuts priced in for the year, a stark contrast versus yesterday’s ~86bps. Swap rates are at their lowest levels in over a year, with nearly the entire curve now below 4%.

Labor market shows further signs of cooling. Nonfarm payrolls increased by 114,000, less than 175,000 surveyed estimates and the second lowest monthly result since April 2020. June’s figure was downwardly revised from 206,000 to 179,000. The unemployment rate climbed to 4.3% vs. expectations of no-change from June’s 4.1% level. Wage growth was below estimates on both a month-over-month and year-over-year basis, and both declined vs. June. Some pointed to Hurricane Beryl has a one-off that may have impacted the results, but the data were broadly viewed as pointing to a real softening in labor market conditions. Renaissance Macro head of US economics Neil Dutta said, “The Fed stepped on a nail…” and believes that at least two 50bp cuts are a “reasonable baseline” for this year. His opinion is shared by economists at JP Morgan and Citi who revised their outlooks and now expect the Fed to cut rates 50bps at both the September and November FOMC meetings.

Fed’s Goolsbee says the Fed must not “overreact” to today’s data. Despite clear evidence that labor market strength is subsiding, Chicago Fed President Goolsbee argued that the Fed must act in a “steady” manner. He stated that the Fed cannot allow one month’s data to push them to “overreact,” adding that it is the Fed’s job to evaluate data on a broader basis. However, he did say that “if unemployment is going to go up higher than the neutral rate, that is exactly the kind of pinching on the other side of the mandate that the law says the Fed has to think about and respond to.”