It’s been a super busy last week of July and start to August, which rounds off with the monthly US employment report and the non-farm payrolls data. The Fed appears to be getting greater comfort that inflation is moving to its 2% target, with money markets favouring a first rate cut of the cycle in September. Policymakers are very much data dependent and will need greater confidence of softer economic figures if they are to follow through with policy easing.

Of course, the FOMC has a dual mandate, which it highlighted in its statement this week, of stable prices and maximum employment. The view on US inflation has now been modestly downgraded, so going forward, the labour market and a soft landing are increasingly in focus. Rate setters do not want to keep policy too restrictive for too long and are aware headwinds in the economy could intensify in the coming months.

Slowing job growth

Consensus expects still relatively solid job gains. A headline of 175,000 is forecast, a touch below the three-month average of 177,000, and slower than the prior number in June of 206,000 and the 12-month average of 218,000. As always, watch out for any major revisions. The rate of average hourly earnings is again likely to print at +0.3% m/m.

Interestingly, the jobless rate is forecast to stay above the FOMC’s June projection of 4% at the end of the year.  There is some focus on the “Sahm rule” after the former NY Fed President Dudley cited it. This says there will be a recession once the u/e rate rises 0.5% above its low for the previous 12 months. But even if the unemployment rate continues to rise by another 0.1% in July, the Sahm rule is highly unlikely to be triggered, as the earlier low of 3.5% in July 2023 drops out of the 12-month comparison period and is replaced with a higher value of 3.7%. Economists again note that the household survey remains a lot weaker than the BLS part.

Fed officials have recently been warning that there could be more upside risks to unemployment, and they don’t want to start to see the labour market weaken substantially. Currently, job losses are modest as labour supply growth is outstripping demand. But forward-looking indicators point to potential risks in the months ahead. At least the increasing slack means that wage growth will likely cool.

Market reaction

Money markets are pricing in two or three cuts this year, with the first coming in September. But the odds of three cuts by December increased after Wednesday’s FOMC meeting, putting the chances at 72%. A strong report could push these cuts back out, with much attention on the next NFP data released a couple of weeks before the September Fed meeting. The dollar would likely be bought, and stocks suffer.