A 50bp cut in September ‘more likely’ after Investing.com downgrades jobs

Citi analysts raised the likelihood of a 50 basis point rate cut by the Federal Reserve in September following a significant downward revision to US job gains.

Citi explained in its Thursday note that the Bureau of Labor Statistics (BLS) revised down job gains from March 2023 to March 2024 by about 818,000, or about 68,000 per month.

This adjustment, while substantial, shifted attention more to the unemployment rate as a key factor in the Fed’s future policy.

The Citi note points out that this downward revision lowers the threshold for a 50 basis point cut in September. “The key development is not that the employment level is nearly a million jobs lower than previously reported,” Citi explained. “Rather, it’s the fact that the monthly rate of job growth was increased by an average of 68,000 per month.”

This suggests that if the August jobs report shows, say, a gain of 170,000 jobs, the Fed and the markets could interpret the actual figure to be closer to 102,000.

The impact on Treasury markets was notable, with two-year Treasury yields falling below 4.0% following the revision.

Citi argues that this drop in yields reflects market expectations for a more accommodative Fed stance. The adjustment in wages data means the bar for a 50 basis point cut is now lower, making such a move “more likely” if the unemployment rate continues to rise.

They say the final decision will depend on the August jobs report, due out in early September.

As Citi noted, “the focus is more squarely on the unemployment rate,” with the possibility of a 50 basis point cut, depending on unemployment not falling significantly.

Citi concludes that markets will remain attentive to other labor market data, including jobless claims and PMI numbers, which will influence Treasury yields and Fed policy expectations.