August jobs report confirms July’s weakness, forcing Fed to cut rates 50 bp in September De Investing.com

Investing.com — August’s jobs report will likely show that the weak labor market seen in July was not temporary, paving the way for the Fed to kick off the rate-cutting cycle with a jumbo cut, economists said from Citi in a recent study. note.

“We expect a similar report to July’s to confirm that the weaker data in July was not a one-off, but rather reflects a real weakening in the labor market, which will prompt officials to cut rates by 50bps to start discount cycle,” Citi said.

As a September rate cut is now widely expected, the size of the cut has sparked heated debate. The odds of a 50 basis point cut versus 25 basis points have varied widely this month.

Following July’s soft jobs report, many were convinced the Fed would need to cut 50 bp to avoid recession, with some even calling for an emergency cut. But as economic updates came in, including positive jobless claims data, initial worries about a recession were pushed aside and bets on a 25 basis point cut took center stage.

It wouldn’t take much to tip the Fed’s rate cut scale to more than 50bps, Citi says, forecasting a modest gain of 125,000 jobs in August, with the jobless rate holding steady at 4.3% .

That would still be in line with Citi economists’ view that job demand is genuinely weakening, rather than being affected by temporary factors.

Even if unemployment falls slightly, signaling a slight one-month improvement in the labor market, that may not be “enough to convince Fed officials that the risks of further easing have abated,” Citi added.

The incoming data suggest July’s weaker nonfarm payrolls were not transitory, Citi said, pointing to continued weakness in various sectors, including construction, government and manufacturing, that will likely weigh on August’s jobs report.

With the August jobs report due on September 6 coming just before the Fed’s September shutdown period, the data, Citi expects, “will heavily influence whether the Fed opts for a 25 or 50 rate cut of base points to start its relaxation cycle. .”