Labor Data Fuels Debate Over Pace of Fed Cuts

Markets shed risk on weak labor results. UST yields fluctuated throughout the morning and afternoon after data showed labor market contraction in August and following Fed Governor Waller’s comments which were interpreted as supportive of a larger, 50bp cut in September. The policy sensitive 2-year yield ended the day ~10bps lower at ~3.65%, while the 10-year yield was roughly unchanged at ~3.71%. Equities suffered, with the S&P 500 down ~1.73% on the day and the NASDAQ down ~2.55%.

August labor data highlights soft landing risks. Nonfarm payrolls grew 142,000 in August, falling short of 165,000 survey estimates, while July’s results were revised down from 114,000 to 89,000, adding to the string of recent data pointing to labor market deterioration. Though the unemployment rate declined slightly to 4.2% from 4.3% in July, it remained elevated compared to 2023 levels. Chief Investment Officer at CIBC private wealth David Donabedian said, “The soft August payroll report does not scream recession, but it does underline that the balance of risks to a soft-landing scenario is to the downside.”

Fed Governor Waller highlights “need for speed” given labor conditions. Following today’s labor results, Fed Governor Waller offered comments indicating that he supports a more aggressive timeline for Fed easing. He said, “The balance of risks has shifted toward the employment side of our dual mandate…the current batch of data no longer requires patience, it requires action.” He also hinted at the possibility of a 50bp cut saying, “If the data suggests the need for larger cuts, then I will support that as well.” Immediately following the public release of his speech, the policy sensitive 2-year UST yield fell to ~3.59%, its lowest point during intraday trading, before rallying into the close.