When US payrolls were revised sharply lower, bond yields dropped, supporting expectations that the Federal Reserve would slash interest rates in September.
Shorter maturities drove the increase in treasuries across the curve. A 100 basis point easing in 2024 is what swap traders are pricing in. According to the contracts’ implied rate, traders anticipate a quarter-point decrease in value next month, with a roughly 20% possibility of a half-point decrease. Stocks marginally increased.
The annual revision of job growth normally does not affect trading, but this time it attracted attention because of recent worries that the labour market is cooling too rapidly in the face of high rates.
Compared to earlier reports, the US job growth in the year ending in March was likely significantly less strong. For the 12 months ending in March, there will probably be an 818,000 reduction in the total number of employees on payroll. Since 2009, this was the biggest adjustment that went down.
“The main message from the revisions in my mind is reinforced just how ‘silly’ it is to let the next jobs number be the determinant in whether to go 25 or 50 in September,” said Neil Dutta at Renaissance Macro Research. “What this revision data implies is that whatever the next jobs number is going to be, it’s probably lower in reality.”
Jamie Cox at Harris Financial Group says that “if you are in the rate cut in September camp, these data all but ‘seal the deal’ on what Fed needed to cut rates.”
Before Jerome Powell speaks on Friday in Jackson Hole, traders will be going through the minutes of the most recent Fed policy meeting on Wednesday. We’ll be looking for any hints about the direction that rates will go in the coming months as well as any indication of when the Fed will stop its present quantitative tightening program.
Treasury 10-year yields dropped to 3.77%, a three basis point fall. The S&P 500 was up close to 5,610. With stronger discretionary spending, Target Corp. saw an 11% increase in Q2 earnings and the end of a run of losses in sales. Reducing its expectation for sales for the remainder of the year, Macy’s Inc. marginally undershot estimates for its quarterly revenue.
According to Krishna Guha of Evercore, the significant adjustments to payroll will support the Federal Reserve’s view that the labour market has been loosening as a result of restrictive policies and that the Fed will need to quickly adjust interest rates to keep this from happening over time.
For 50 basis-point rate decreases, all of this suggests setting a comparatively “low bar.” A series of 25 basis-point moves continues to be the default scenario.
“We are confident this will be the takeaway from Powell at Jackson Hole Friday,” Guha noted. “But in the interim, we suspect minutes from the July meeting may well feel ‘hawkish-stale.’ A lot has happened since then.”
Don Rissmiller of Strategas claims that there is now more evidence to support lower policy rates. The Fed must legitimize the current cycle of rate cuts, which he pointed out will probably require several cuts, alluding to Powell’s speech at Jackson Hole on Friday.
Jennifer McKeown of Capital Economics believes that central bankers would likely emphasize their “data dependence” rather than provide much forward-looking guidance at the Jackson Hole symposium.
“Since most economies are expanding, inflation is easing back to target and financial markets have stabilized after the recession scare a few weeks ago, there is less pressure for them to steer markets than there has been around past events,” she noted. “But they risk keeping rates too high for too long.”
According to Solita Marcelli of UBS Global Wealth Management, the environment is still favourable for stocks because of the Fed’s impending decision to lower interest rates from their current restrictive levels as well as the persistence of strong economic and earnings fundamentals.
“Our base-case year-end and June 2025 S&P 500 price targets remain 5,900 and 6,200, respectively.”
According to Marcelli, quality growth is still in a strong position to exceed. She pointed out that companies with a competitive edge and exposure to structural factors ought to be in a better position to steadily increase and reinvest earnings.
“The volatility from the past month has settled, as macro fears subside, expectations were reset, and investors used the weakness as an opportunity to add to risk exposure,” said Mark Hackett at Nationwide. “The next catalyst for markets is Fed data, including the minutes from the FOMC meeting and the Jackson Hole speeches. This likely results in a wait-and-see approach until Friday.”
