US Nonfarm Payrolls report raises 'fresh challenges' for Fed

The August nonfarm payrolls report was a slight disappointment, providing fresh confirmation of a continued cooling in US labour market conditions. The 142k net jobs added last month was slightly below consensus, while there was also a relatively sizable downward revision to the July number, dragging the 3-month moving average of job creation to its lowest level since the early days of the COVID-19 pandemic.

We are, however, continuing to see a dichotomy between the household and establishment survey. There was no upside surprise in the jobless rate, as this dropped as expected to 4.2%. Wage growth is also accelerating again, which may provide a fresh challenge for the Federal Reserve in its quest to achieve its price mandate.

While markets have ramped up their bets in favour of a jumbo rate reduction from the Fed this month, the data in itself hasn’t been sufficient to seal the deal for a 50 basis point cut, which remains less than 60% priced in by futures markets. Next week’s CPI report for August will now be key, as a miss here may be required for the FOMC to go big in September.