Rates Plummet Again Ahead of Labor Data While BOE Cuts Rates

Rates continue to fall ahead of tomorrow’s nonfarm payrolls data. Swap rates fell 3-11bps across a steepening curve today, a continuation of yesterday’s FOMC-inspired ~10bp decline. The highest level of unemployment claims in nearly a year and the biggest manufacturing contraction in 8 months contributed as well. The former was 1877k in the week that ended July 20^th versus the 1855k forecast, while the latter was at 46.8 in July versus 48.8 expected. Meanwhile, equities plummeted as bonds rallied, with the NASDAQ and SPX down 2.3% and 1.37%, respectively.

Bank of England cuts rates. For the first time since 2020, the BOE’s Monetary Policy Committee voted 5-4 to cut rates 25bps, with Governor Andrew Bailey casting the tie-breaking vote in favor of a reduction. While the doves ultimately prevailed, members who voted against the move say that risks of persistent inflation had not “conclusively dissipated.” Meanwhile, Governor Bailey refrained from offering a future rate path, stating in an additional statement that “we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or too much.” Futures markets now expect one-to-two 25bp rate cuts by year-end.

Nonfarm payrolls is expected to show further labor market slowing. The number of jobs added in July is expected to fall to 175k from 206k in June, yet another sign that the labor market is weakening. A sustained slowdown would likely cement the Fed’s 25bp rate cut in September, especially after Chair Powell highlighted risks to the labor market at yesterday’s FOMC meeting press conference.  Meanwhile, the unemployment rate is expected to remain flat at 4.1%, while year-over-year average hourly earnings are expected to decline to 3.7% from 3.9%.