The U.S. non-farm payrolls report for July will be released at 8:30 tonight, which is crucial to the Federal Reserve's decision to cut interest rates in September.
As Powell emphasized this week, with inflation falling sharply, the Fed no longer needs to focus 100% on inflation, but can focus on the risks of the dual mission of inflation and employment at the same time. In other words, the Fed's attention to employment will increase significantly. Powell said that officials unanimously believe that the time for a rate cut is getting closer, and if conditions are met, the rate cut will be as early as September.
The US unemployment rate unexpectedly rose to 4.1% in June, but the number of new non-farm payrolls unexpectedly reached 206,000, which was better than expected. The contradiction between the two data may be the reason why the Federal Reserve continues to wait and see. Will this situation happen again this month? It is worth paying attention to.
Market expectations: Employment slows but remains robust
Currently, the market expects that the U.S. will add 175,000 new non-farm jobs in July after seasonal adjustment, the unemployment rate is expected to remain at 4.1%, the average hourly wage is expected to be 3.7% per year, the monthly rate is expected to be 0.3%, and the labor participation rate is expected to remain at 62.6%.
Jonathan Pingle, U.S. economist at Natixis Bank, was slightly more pessimistic: "We estimate that nonfarm payrolls increased by 165,000 in July, with private payrolls increasing by 140,000." He said this estimate reflects a continued slowdown from the breakneck pace of job growth earlier this year. Pingle added:
"This month's forecast is subject to unusual uncertainty due to the impact of Hurricane Beryl and a large seasonal adjustment in education sector employment in July."
One of the clearest signs of a recent slowdown in the U.S. labor market is the steady rise in the unemployment rate from a record low of 3.4% in April 2023 to 4.1% in June. Last month's rise in the unemployment rate almost triggered the so-called Sam's Rule, an indicator that predicts a recession, which states that once the three-month moving average of the unemployment rate is 0.5 percentage points above the low point of the past year, it means that a recession has begun.
Claudia Sahm, founder of Sahm's Rule, said the recent rise in unemployment may be caused by labor force expansion driven by immigration, but there is also an element of "regular" unemployment that should not be ignored. Beth Ann Bovino, chief economist at Bank of America, said she expects unemployment to continue to rise, but "not by much."
Meanwhile, monthly job growth remains solid but has fallen from an average of 250,000 jobs per month last year. Recent gains have been concentrated in two industries: health care and government. Temporary employment has also been steadily declining since the beginning of 2022, falling by 49,000 jobs in June, the largest monthly drop in the past two years. Dante DeAntonio, senior director at Moody's Analytics, said that if the labor market continues to cool, the United States may only add 100,000 jobs per month by the end of the year.
The number of unfilled jobs has also been decreasing, leading to a decline in the ratio of job openings to job seekers. The trend suggests the labor market is more balanced than a year ago, with the ratio of job openings to unemployed workers now at 1.1.
Wage growth, which is closely tied to service sector inflation, has also slowed. The latest employment cost index released earlier this week showed that the annual rate of labor costs for U.S. employers slowed to 4.1% in the second quarter, well below the peak of nearly 5.1% in 2022. The slowdown in wage growth was also confirmed by Wednesday's "small non-farm" ADP employment report, which showed that wages for workers who remained in their jobs increased by 4.8% year-on-year in July, the smallest increase in three years after a 4.9% increase in June.
The following is the impact of various sub-item data on the market of major asset classes:
Fed shifts focus to jobs
This week, the Federal Reserve officially began paving the way for a September rate cut. The wording of the July policy statement was changed to point out that inflation was only "slightly" high, while also mentioning that "job growth has slowed." In the press conference after the meeting, Fed Chairman Powell provided more clues about the September rate cut.
"The Fed kept monetary policy unchanged but provided enough information for the market to continue to believe in the rate cut expectations of the September FOMC meeting," wrote James Knightley, chief international economist at ING. Elyse Ausenbaugh, head of investment strategy at JPMorgan Wealth Management, believes that "the market has digested the slightly more hawkish statement than expected very well." He also pointed out that if tonight's employment report performs worse than expected, the situation may change. He said:
“That could raise concerns that the Fed is behind the curve, even if Powell does his best to signal that the Fed is willing to cut rates under those circumstances.”
The U.S. job market remains solid but no longer overheated. Even so, the Fed still wants to prevent the economy from slowing further, leading to massive unemployment and even a recession. Powell said this week that the unemployment rate remains low, the labor market has become more balanced, and the downside risks facing the current job market are real.
Other Fed policymakers have also recently noted that labor supply and demand are more balanced than in past years. "Job growth is not excessive given the level of immigration, nominal wage growth is close to levels consistent with price stability, the unemployment rate is close to its long-term normal, and the job vacancy rate is close to its pre-pandemic level," Fed Governor Waller said in mid-July. "The involuntary layoff rate has remained stable at 1% for more than two years." He said:
“We may well be able to achieve a soft landing in terms of the employment side of the dual mission.”
“For policymakers, the story is simple: The overall data points to weakening labor market momentum and easing price and wage growth,” wrote Gregory Daco, chief economist at Ernst & Young. He said the latest trends, including easing inflation, suggest it’s time for the Fed to “recalibrate policy to current economic conditions and the expected outlook for the future.”
Article forwarded from: Jinshi Data