US Payrolls suggests that Fed has “left it too late” to cut rates as futures markets in “overdrive”

This is an extremely soft US labour report. A big miss in the July payrolls number and a downward revision to the June data totalling 88k less jobs than expected in the past two months alone.

Average wage gains have fallen to their lowest level since May 2021, which should continue to ease upward pressure on inflation, with the jobless rate also jumping far above estimates to 4.3% - its highest level since October 2021.

The undoubtedly disappointing data has amplified concerns that the Fed has perhaps left it too late to start cutting US interest rates. Futures markets have gone into overdrive in the past couple of trading sessions and are now pricing in almost 110 basis points of Fed rate reductions by year-end, from around 65bps at the start of the week.

This would amount to a front-loading of easing, perhaps beginning with a jumbo 50 basis point cut at the next FOMC meeting in September.

While we think that this is an excessive repricing, there is now clearly a big risk that the Fed lowers rates at every meeting this year in September, November and December.

This could present some additional downside for the dollar, as this would likely be a faster pace of policy normalisation than in most other major economic areas.