The US labor market report for August showed a significant slowdown, with non-farm payrolls rising by only 22,000, well below the consensus estimate of 75,000. This represents a three-month average of just 29,000, a notable decline from previous months. The unemployment rate also rose to 4.3%, breaking above its 15-month range and reaching a level last seen in 2021 during the post-COVID recovery. The average weekly hours and year-over-year hourly earnings were also below expectations.
According to economists John Davies and Steve Englander of Standard Chartered, the labor market has shifted from “solid” to “soft” in less than six weeks. This change in the labor market has opened the door to a potential 50 basis point (bps) rate cut at the September Federal Open Market Committee (FOMC) meeting. This is a more significant cut than the 25bps previously expected.
While the current Fed rate-cut pricing is at 28-29bps for September, it has not yet reflected the likelihood of a 50bps cut. The economists believe that preliminary revisions to employment data, due to be released next week, will support their call for a 50bps cut. They also suggest that the headline payrolls and unemployment data may not fully capture the extent of labor market softening due to distortions from the birth-death adjustment and the decline in the employment-population ratio.
The economists expect that after an initial 50bps cut, it may take time for the market to price in a slower subsequent pace of cuts. They doubt that the growth and inflation backdrop will allow for further easing beyond September. Overall, the August labor market report has increased the likelihood of a more significant rate cut at the September FOMC meeting, and the market is expected to adjust its expectations accordingly in the coming weeks.