• US non-farm payroll employment rose 142k in August
   
• Revisions to the two prior months were lower, subtracting 86k from the previously reported figures
   
• Unemployment rate ticked down to 4.2%

• Average hourly earnings gain 0.4% MoM, up 3.8% YoY

• Labor force participation unchanged at 62.7%

• JOLTS data pointed to lower job openings, suggesting that the US labor market continued to cool

• US payrolls fail to resolve the 25 or 50bps rate cut call, CPI to get final say on size of Fed cut

The August employment report indicated that while the jobs market is not unravelling, it continues to clearly weaken. The non-farm payrolls increased by 142k, which was below the expected 165k and on a three-month basis, continued to head lower. Moreover, job gains in the two prior months were revised lower by 86k. Downward revisions to job growth in the prior two months pushed the three-month moving average for nonfarm payroll growth down to 116k. This marks a notable deceleration from the average monthly job growth of 207k in the first half of the year and 251k in 2023. The breadth of hiring improved slightly over the month but continues to be concentrated in less-cyclically sensitive industries.

Job growth in August was a bit more broad-based than it was in July. Employment growth continues to be led by hiring in less cyclically-sensitive industries such as health care & social assistance (+44k), leisure and hospitality (+46k) and government (+24k). Construction employment also posted a strong 34k increase in the month, but elsewhere hiring was tepid with just an 8k increase for profession and business services and contractions in manufacturing (-24k), retail trade (-11k) and information (-7k).

The unemployment rate ticked lower from 4.3% to 4.2%, the participation rate stabilized at 62.7% and wage growth even accelerated to 0.4% MoM and 3.8% YoY.

In the household survey, a stronger gain in civilian employment (+168k) outstripped a further increase in the labor force (+120k) – pushing the unemployment rate down 0.1 percentage points to 4.2%. However, even with the downtick, the unemployment rate is still up from 3.8% a year ago. The labor force participation rate held steady at 62.7%. Meanwhile, joblessness has continued to rise on trend, with the Sahm Rule indicator, at 0.57, still above the threshold historically associated with recession. The rise in the broader U-6 measure of unemployment, which also captures under-employment, to a new cycle high demonstrates further signs of softening beyond the Employment Situation report’s marquee nonfarm payroll numbers. A broader measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find fulltime employment, surged to 7.9%.
 

Average hourly earnings grew a touch more than expected in August, up 0.4% over the month and 3.8% over the past year. Yet despite the uptick, we believe concerns about labor costs keeping inflation uncomfortably high can be put aside for now. The overall loosening in the labor market suggests wage pressures continue to abate.
 

US payrolls fail to resolve the 25 or 50bps rate cut call, CPI to get final say on size of Fed cut

NFP viewed as dovish but not disastrous.US jobs data failed to provide clarity on whether the US Federal Reserve will deliver a 25bps or 50bps cut at the September 18 meeting. Although the number of jobs created missed estimates, there was enough in the report to keep markets on edge for a little while longer.

The US economy added 142k jobs in August, compared to 165k consensus. Most other metrics printed near consensus as well. The unemployment rate ticked lower from 4.3% to 4.2%, the participation rate stabilized at 62.7% and wage growth even accelerated somewhat more than expected to 0.4% MoM and 3.8% YoY. However, as we feared the report needed to be perfect across the board to stop recent market momentum of shifting towards 50bps rate cuts. And it was not. June and July payrolls faced a combined downward revision of 86k, making the total miss some 109k.

The US dollar (USD) has been navigating through choppy waters lately amid the ongoing uncertainty about whether the Fed will lower rates by 25bps at its upcoming meeting or by 50bps. The Fed’s much awaited policy shift finally came in August at the central banks’ annual symposium in Jackson Hole. Chair Powell acknowledged the cracks that have started to appear in the labour market and in doing so, he opened the door to a possible 50bps move in September. Much of the commentary since then has not supported the need for aggressive action as the data has been mostly solid.

The big question is how much will the Fed prioritize its employment mandate over price stability when upside risks to inflation remain? The ISM’s prices paid gauges for both manufacturing and services edged up in August even as employment contracted for the former and barely grew for the latter.

The August US non-farm payroll report has been interpreted as largely dovish by the markets. Job growth showed clear signs of slowing, but the slight decrease in the unemployment rate has helped ease immediate recession fears. Nevertheless, while the data points to a cooling labor market, it was not severe enough to suggest a sharp economic downturn. Hence, investor sentiment remains cautious but not overly negative.

In another sign of a cooling labor market, the more backward-looking Job Openings and Labor Turnover Survey (JOLTS) report revealed that job openings fell more than anticipated in July to 7.7 million. This marked the lowest level in more than three years. Additionally, the job openings to unemployed workers ratio declined to 1.1 from a high of 2 in early-2022. The job separation rate also ticked up in July after a dip in June, though it still remains relatively low. Overall, the JOLTS data suggests that the pandemic era of tightness in the labor market has receded and adds to the mounting evidence of cooling labor demand and a slowing economy.

The August non-farm payroll report showed weaker-than-expected job growth but did not definitively signal a 50bps rate cut for Fed’s upcoming meeting this month. Initially, the odds of a 50bps rate cut spiked to above 50% following the NFP data, but those odds had dropped back to 30%, unchanged from last week. In short, the data showed the labor market is not falling apart, but it clearly has weakened from its robust state earlier this year.

However, markets have now priced in more than 90% chance of a total 100bps cut by yearend, up significantly from 70% just a week ago. This suggests that while market still expect rate cuts, they may foresee the Fed taking a more cautious, drawn-out approach rather than delivering aggressive action upfront.

US CPI to get final say on size of fed cut. This week CPI report (11 September) will be the last piece of the jigsaw ahead of the September decision and should provide some clarity as to what to expect. The headline CPI rate cooled to 2.9% YoY in July and is expected to fall again to 2.6% in August. The core rate, however, is forecast to have stayed unchanged at 3.2%.

If the above numbers are confirmed, the Fed is more likely to deliver a ‘dovish cut’ of 25bps. But there would have to be a significant downside surprise for there to be a realistic chance of a 50bps reduction.

Investors have priced in 30% probability of a 50bps cut so there is room for disappointment, with the USD possibly turning higher if the CPI data is more or less in line with expectations or stronger. Producer prices will follow on Thursday and Friday’s preliminary survey on consumer sentiment in September by the University of Michigan will be important too, particularly the one- and five-year inflation expectations.

Fed officials have been clear in recent communication: rate cuts are imminent. However, market participants are still wrestling with whether the FOMC will cut by 25bps or 50bps at its next meeting in less than two-weeks. In a statement, Federal Reserve Governor Christopher Waller backed an interest rate cut at the upcoming central bank policy meeting in less than two weeks, and indicated he’d be open to a substantial reduction if necessary. Governor Waller pointed to starting rate cuts “carefully”, but was open to steeper cuts, or cuts at consecutive meetings if the data warrant it. New York Fed President John Williams, following release of the labor report, said the Federal Reserve should cut interest rates at its upcoming September meeting, as other officials also got behind the Fed taking action. Chicago Fed President Austan Goolsbee also said it was time for the Fed to act on interest rates.

Looking ahead, if upcoming CPI data surprises on the upside, Fed could face increased pressure to hold off on larger cuts, reinforcing the risk of a delayed but deeper economic downturn. A slower response from Fed may ultimately lead to more pronounced weakness in the labor market and broader economy, forcing the central bank to take stronger action, on at a later time. Clearly the labor market has cooled over the past year, but we feel there is not enough evidence to suggest that the recent softening is the start of a more serious deterioration in underlying fundamentals.

Source: BIMB Securities Research - 9 Sept 2024