Citigroup expects 125,000 nonfarm payrolls, prompts Fed to cut rates by 50 basis points

In a note to clients on Tuesday, Citigroup analysts said they expect the upcoming nonfarm payrolls (NFP) to show 125,000 new jobs and an unemployment rate of 4.3%.

Citigroup said the "shift from inflation to employment is complete," suggesting the Fed's focus in setting policy will shift from inflation indicators to employment data.

Citigroup's forecasts suggest that a 125,000 increase in jobs, combined with an unemployment rate of 4.3%, would be enough to prompt the Fed to cut rates by 50 basis points.

The note noted that if the unemployment rate fell slightly to 4.2%, the Fed might opt ​​for a smaller rate cut of 25 basis points, but that would not change Citigroup's expectations for continued easing in the labor market and a slowing overall economy.

The bank said volatility in the labor market has become as pronounced as volatility in inflation data in recent years.

Citi said that "relatively small differences in Friday's jobs data could have significant implications for Fed policy."

For example, they believe that if the unemployment rate remains at 4.3% and nonfarm payrolls remain at a healthier level of around 175,000, the Fed is still likely to implement a 50 basis point rate cut.

Conversely, if payrolls fall below 125,000 and the unemployment rate is 4.2%, more significant payroll cuts may be in place.

The bank added that broader labor market trends point to a continued weakening labor market, with slowing hiring, falling work hours and rising unemployment.

"We know from previous cycles that once this cycle begins, it develops into a U.S. recession. Friday's jobs report, along with Wednesday's JOLTS, will help us assess whether this development is sustained," Citi said.