Policy outlook
The July jobs report suggests that a September rate cut is in the bag. Following rising weekly jobless claims and a notable downside surprise to the latest ISM survey, the Fed will be nervously watching to see how economic data evolves over the coming month. Already, several market commentators have warned that the Fed has waited too long before easing policy, raising the risk of a hard landing. However, a key question facing the Fed will be whether the level, versus magnitude of change, matters more.
Markets have responded very negatively to today’s report. But just as markets over-reacted to Powell’s dovish remarks last October, and then once again in April as inflation numbers came in hotter than expected, this is likely an exaggerated reaction too. The labor market is clearly cooling but, with payrolls above 100k, talk of recession is premature. And although the unemployment rate has risen, it is partially due to rising labor supply. Much will depend on how the incoming economic data evolves and, with two more inflation prints and a payrolls print still to come before the FOMC meets again in September, the Fed will have much to consider. At this stage, however, the very negative market response looks overdone. We continue to expect rate cuts in September and December- however, a further deterioration in the broad inflation and labor market data may also add a November cut to the mix.
