Wall Street interest rate cut expectations suddenly changed! Goldman Sachs calls for three times this year, Citigroup shouts 2 times 50 basis points, JP Morgan predicts emergency rate cuts

The US non-farm payroll increased by 114,000 in July, the lowest since December 2020, far below the expected 175,000, and a significant decrease from the previous 206,000 (revised down to 179,000), pushing the unemployment rate to its highest level in nearly three years. Major Wall Street banks have raised their expectations for the number of rate cuts this year, with Goldman Sachs expecting three rate cuts this year, and a possibility of a 0.5% cut in September. Citigroup also stated that rate cuts of 0.5% could occur in both September and November. JPMorgan Chase even mentioned that there are reasons to take action before the September meeting.

Analysts believe that this employment report adds to a series of disappointing US macroeconomic data this week, raising concerns about a faster decline in the US economy, leading to a stock market decline and a decrease in US bond yields. These data may lead Federal Reserve officials to believe that their policy has cooled the labor market excessively, rather than returning to pre-pandemic levels of health.

Federal Reserve Chairman Powell stated at the FOMC press conference on Wednesday that the earliest possible start for rate cuts is in September, and traders are close to expecting a 0.5% cut at the September meeting.

Goldman Sachs: Three cuts this year, Citigroup: Cut to 3%-3.25% by mid-next year

Wall Street banks are increasing their expectations for an aggressive rate-cutting cycle by the Federal Reserve. Economists at Goldman Sachs, Citigroup, JPMorgan Chase, and Bank of America revised their forecasts for US monetary policy on Friday, calling for earlier, larger, or more rate cuts.

A team led by Goldman Sachs economist Jan Hatzius predicts that the Federal Reserve will cut rates by 0.25% in September, November, and December, compared to the bank's previous forecast of two cuts in September and December. The Goldman Sachs team stated that although the July data may have exaggerated the weakness in the labor market, if the August report also shows weakness, a 0.5% rate cut in September "will become possible".

Citigroup's forecast is more aggressive, expecting cuts of 0.5% in September and November, and 0.25% in December. Citigroup is one of the most aggressive banks in predicting rate cuts by the Federal Reserve this year, as they previously forecasted three cuts of 0.25% each in separate meetings.

Analysts Veronica Clark and Andrew Hollenhorst at the bank predict that from early next year to mid-next year, the Federal Reserve will cut rates by 0.25% at each meeting, until the policy rate range reaches 3%-3.25% by mid-2025.

According to Citigroup's report, "Given the inherent asymmetry in potential Fed actions, this dovish pricing is appropriate."

JPMorgan Chase economists also changed their view on the Fed's forecast to cuts of 50 basis points at the September and November policy meetings. They also believe that there is a possibility of emergency rate cuts between meetings, with "strong reasons" to take action before the planned policy announcement on September 18.

Meanwhile, the team of economists at Bank of America led by Michael Gapen, who previously expected rate cuts to start in December, now changed their view, stating that they expect the first rate cut to occur in September. The bank's analysts stated:

"We now expect rate cuts in September and December. Although the employment numbers are not ideal, we believe they have been affected by Hurricane Beryl. We will also lower the terminal rate in the upcoming rate cut cycle to 3.25%-3.5%, 25 basis points lower than before."

Federal Funds Contracts See a Large Amount of Buying Interest

After Citibank adjusted its Fed rate cut forecast to 50 basis points at the September meeting, there was once again a large amount of buying interest in the October federal funds contracts.

At 10:12 am New York time, there was a block trade of 18,000 contracts of the October federal funds futures contract at a price of 95.115, corresponding to a risk weight of approximately $750k/DV01. Following that, at 10:23 am, another block trade of 6,000 contracts of the same contract was executed at a price of 95.135, corresponding to a risk weight of approximately $250k/DV01.

The trading volume of October federal funds futures on that day had reached nearly 250,000 contracts, far exceeding the 15-day average of 120,000 contracts.

As the contract expires on October 31st and only includes the September policy meeting, buying at these levels will benefit from the half-point move at the September policy meeting.

Meanwhile, there was a significant amount of buying interest in the August federal funds futures after J.P. Morgan released expectations of an emergency rate cut before September, including approximately 20,000 contracts traded between 11:21 and 11:25 New York time. This contract will expire on August 30th before the Fed announcement on September 18th, so new risk buying at these levels will benefit from the additional pricing of emergency policy action between meetings.

The highest trading volume occurred at 10:45 and 10:53, with a total of 3,000 trades at price levels of 94.695 and 94.690. The contract's highest price was 94.71, implying a rate of 5.29%, equivalent to a rate cut premium of about 4 basis points, or approximately a 15% probability.

Interest rate swaps indicate that the market believes there is over a 70% chance of a 0.5% rate cut in September, and it is expected that a total of around 115 basis points will be cut by the end of the year