Nonfarm Payrolls is not actually expected to be lousy

The 50 bp horse has the bit in its teeth and is running away no matter what payrolls turn out to be. This is the triumph of preconceptions over facts. The 50-bp-ers are still a minority, if a big one, and are likely in for an unhappy surprise. Payrolls, like yesterday’s unemployment claims, are probably okay. Cooling market, yes, but no real cause for dram at the Fed. Payrolls are expected at 140,000-160,000 and the unemployment rate to fall back to 4.2%.

Both the Challenger and ADP private sector jobs reports were grim and seemingly vindicated the Gloom Crowd. Nonfarm payrolls are expected to join the crowd of “bad” jobs data regardless of what it is, and drive the dollar down some more on the 50 bp rate cut narrative.

The Bloomberg headline at noon yesterday was “Wall Street’s Big Bet on Jumbo Fed Cuts Hangs on US Jobs Report.”

But nonfarm payrolls is not actually expected to be lousy. Here is the lead para in a Reuters article: “U.S. job growth likely picked up in August, with the unemployment rate forecast to have dropped to 4.2%, which would offer more assurance that an orderly labor market slowdown remained intact and cement expectations of a quarter-point interest rate cut from the Federal Reserve this month.”

Someone with real credibility of economic data is TreasSec Yelle, who said yesterday the US has a "good healthy labor market" (despite the slowdown in job creation). We get two Fed speakers after payrolls today.

The probability of 50 bp at the next meeting is somewhere between 40% and 50%, depending on the time of day and whether you are looking at swaps or Fed funds futures. This is not good enough, is it? Somethinjg else with less than stellar probability is the 100 bp (or more) in cuts by year-end when there are three meetings left, meaning one of them has to be 50 bp.

Ex-Fed Sahm injects some sanity into the discussion. “Recalibrating policy to avert further slowing in the labor market while maintaining progress on inflation is difficult. Even the first step of assessing labor market conditions is hard.” Sahm reiterates all the multiple measures, some with charts, and repeats that demand based measures alone do not suffice—we need to look at the supply of labor, too. She ends with “Now is not the time to snatch defeat from the jaws of victory with a misguided reading of the labor market.” We take that to mean 50 bp is too much and not needed.

If Citi and JPMorgan are wrong about 50 bp and we (and Sahm and High Frequency) are right, payrolls may still deliver another dollar drop, but all bets are off after that. We could easily see another recovery ahead of the Fed on Sept 18 as doubts creep in, and/or even more recovery after the actual Fed announcement.

Before then, we get CPI next week on 9/11. Not the Fed’s preferred gauge, but everyone watches it anyway. What if core CPI rises from the nice 2.4% in July back to 2.6% as we had in March and April? Those rates were themselves a rise from Dec, Jan and Feb.

JOLTs Tidbit: After our work on Jolts, we saw this comment from High Frequency Economics cited by Bloomberg’s Authers: “Job vacancies declined, hires rose and quits were steady. There is no signal here of any sudden collapse of the labor market or any imminent recession. Openings have come down significantly but remain higher than the 2019 average. Hires and quits moved up last month but current levels are below 2019 averages. Importantly, the vacancies-to-unemployed ratio has mostly normalized in recent months. Relax.” Well, yes, but you don’t need a collapse to set the Fed’s pants on fire. It was already focusing on employment. Now it has more reasons.

Forecast

We have a classic case of the market running away with an under-50% probability outcome that is at odds with a reasonable interpretation of the key data, One more time—the labor market may be cooling, but not enough to justify a 50 bp cut at the next Fed meeting or 100 bp in cuts before year-end. A 50 bp cut is out of the Fed’s normal conduct, too, unless it wants to send a message it had gone too far and wants to kiss and make up. We say this could damage credibility and ain’t gonna happen, but never mind—a near majority thinks it is all too likely and they are running the table.

The abnormal size of the expected Sept cut is what is allowing currencies to stay overbought and the dollar oversold. But remember, even if payrolls add to the 50 bp evidence, we need to expect some big profit-taking after the release.

Political Tidbit: The Harris campaign raised $361 million in donations in August vs. less than half that, $130 million, by Trump. Does this pass the so-what? test? This is America. Of course it does.

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