Weak payrolls needed for FOMC to cut 50 bps – MUFG

The debate over whether the FOMC should cut by 25 or 50 basis points could become clearer by the end of the week when the non-farm payrolls data report for August arrives. There are plenty of economic indicators pointing to a weakening labor market, and if this is confirmed by a smaller-than-expected print on Friday, it will likely trigger another big move in rates and the dollar, given that prices of in the OIS market they are currently well underpriced. in a 50bp cut at the September 18 meeting, MUFG FX analysts note.

US Inflation Falls, FOMC Now Focuses on Jobs Data

“Last week, data on consumer confidence showed an increase in confidence, but despite this, the jobs index worsened and further underlined the prospect that the unemployment rate will continue to rise. The Fed’s thinking on the labor market certainly appears to have changed following the benchmark revision of NFP data, which revealed a downward revision of wages by 818,000 in the year to March 2024 – the second largest on record. These data could reinforce the Fed’s view of rising unemployment and slowing growth in average hourly earnings. Both of these indicators are unchanged from the NFP revision, but are likely to alter the Fed’s forecast of labor market slack, which could shape the Summary of Economic Projections (SEP) to be released at the September meeting.

“In the latest SEP release in June, which would have relied in part on nonfarm payrolls data that we now know overestimated employment growth by an average of 68,000 per month, the unemployment rate was estimated at 4 ,0. % in Q4 2024 and core PCE inflation at 2.8%, what we can see now is exaggerated. Core PCE inflation on Friday for July came in at 2.7%, while the unemployment rate is already at 4.3%. Average hourly earnings growth for July fell to 3.6 percent from a year ago, near 3.5 percent, roughly in line with price stability. So, another weak print on Friday could see even higher revisions to SEPs on September 18, which could force the FOMC to cut by 50 bps. So Friday’s jobs report will be crucial in shaping those expectations.”

“Before Friday, we’ll get a lot of other labor market indicators (ISM employment; JOLTS; Challenger; ADP), so those data will shape expectations in Friday’s payrolls. If it’s weaker than you expected, you’d expect yields to drop to a better price, the 50bps risk. Our inclination this week is for the dollar to weaken again, given that we see a higher 50bp downside risk than is currently implied by the OIS price. Our wage forecast model, which uses the latest estimates of the seasonal and trend components of the series, predicts surprise to the downside in the August wages report.”