USD: Weak payrolls needed for FOMC to cut 50bps – MUFG

The debate on whether the FOMC should cut by 25 or 50bps could well become clearer by the end of the week when the non-farm payrolls data report for August arrives. There are plenty of economic indicators that point to a weakening labour market and if that is confirmed by a lower-than-expected print on Friday, it will likely trigger another big rates and dollar move given the OIS market pricing is currently well short of pricing in a 50bps cut at the meeting on 18th September, MUFG FX analysts note.

US inflation eases with FOMC focus now on jobs data

“Last week the consumer confidence data revealed an upturn in confidence but despite this the jobs index worsened and further underlined the prospect of the unemployment rate continuing to drift higher. The Fed’s thinking on the labour market certainly seems to have shifted following the benchmark revision of the NFP data that revealed a 818k downward revision to payrolls in the year to March 2024 – the second largest on record. That data may harden the Fed’s view on the unemployment rate rising and average hourly earnings growth slowing. Both of those indicators haven’t changed due to the NFP revision but will likely alter the Fed’s projections of labour market spare capacity that may shape the Summary of Economic Projections (SEP) to be released at the September meeting.”

“In the last SEP release in June, which would have been based in part on the non-farm payrolls data that we now know was over-stating employment growth by an average of 68k per month, the unemployment rate was forecast to be at 4.0% in Q4 2024 and the core PCE inflation at 2.8% which we can now see is overdone. The core PCE inflation on Friday for July came in at 2.7% while the unemployment rate is already at 4.3%. Average hourly earnings growth for July fell to 3.6% YoY, close to the 3.5% roughly consistent with price stability. So, another weak print on Friday could see even bigger revisions to the SEPs on 18th September that could compel the FOMC to cut by 50bps. So, the jobs report on Friday will be crucial in shaping those expectations.”

“Ahead of Friday we will get plenty of the other labour market indicators (ISM employment indices; JOLTS; Challenger; ADP) so those data points will shape expectations into the payrolls on Friday. If weaker than expected you would expect yields to drift lower to better price the risk of 50bps. Our bias this week is for the dollar to weaken back again given we see a bigger risk of a 50bp cut than currently implied by OIS pricing. Our payroll's forecasting model which uses the latest estimations of seasonal and trend components of the series, predicts surprise to the downside in the august payrolls report.”