Non-farm data issues a warning! A Federal Reserve Governor "rescues the market"
US job growth rebounded in August, adding 142,000 positions, with the unemployment rate dropping to 4.2%. However, the Labor Department revised down its estimates for job growth in the previous two months, indicating a soft summer hiring season. In response, Michelle Girard, head of the US division at NatWest, believes that this report supports the view of a 25 basis point rate cut by the Federal Reserve, although there are also reasons to consider a 50 basis point cut. New York Fed President Williams stated that it is appropriate to lower the policy rate as inflation nears the 2% target. Following the employment report, the market reaction saw gold giving back some gains and US stocks continuing to decline
US job growth rebounded in August, after summer job growth data fell below initial reports.
According to the Department of Labor, the US economy added 142,000 jobs, higher than July's data. July's data raised concerns about economic slowdown and shook global financial markets; the unemployment rate in August dropped to 4.2%.
The Department of Labor revised down the estimates for job growth in June and July, reducing a total of 86,000 jobs, further indicating weak summer hiring.
The latest non-farm payroll report may not definitively address whether the Federal Reserve will cut interest rates by 25 basis points in September or 50 basis points to prevent unwanted softness in the job market.
Michelle Girard, head of NatWest's US division, believes that this employment report "will not sway anyone from their prior positioning". She noted that the report supports those who believe the Fed will cut rates by 25 basis points, as it shows continued resilience in the labor market. Additionally, with the downward revision of previous values, a 50 basis point rate cut is also justified.
Girard emphasized the Fed's high focus on inflation, with the main concern being whether they can reach the 2% inflation target. However, she pointed out that there is "sufficient evidence" of a downward trend in inflation, shifting the Fed's focus to the economy. Girard said:
"Economically, it is clear that the economy is slowing down. Therefore, I think the real discussion for the Fed is where do you think rates should ultimately be? Or what level do you think you need to reach? Because I think that plays a significant role in the scale of actions you will take."
Following the report released on Friday, gold gave back some of its intraday gains, silver fell over 1% intraday, and US stocks continued to decline, with the Nasdaq falling over 2% and the S&P 500 falling over 1%.
New York Fed President Williams, in a speech shortly after the employment data was released, echoed recent comments from other Fed officials that a rate cut is imminent.
Williams stated, "Now is the appropriate time to reduce the degree of policy constraints by lowering the federal funds rate target range." He said that with the inflation rate nearing the Fed's 2% target, "the economy is in balance, and the monetary policy stance can gradually shift over time to a more neutral stance."
Fed Governor Waller also indicated that maintaining the forward momentum of the economy means it is time to start lowering policy rates at the upcoming meeting.
However, notably, Waller pointed out that if appropriate, he would support an "early" rate cut, and if necessary, he would support a larger rate cut. This may indicate his willingness to directly cut rates by 50 basis points to initiate a rate-cutting cycle at the Fed.
The non-farm payroll report is one of the most anticipated economic indicators in years, with the August report coinciding with the Fed's readiness to cut rates.
Since 2022, investors and the Fed have been closely monitoring inflation for signs of overheating in the US economy. But with price pressures easing in recent months, economists are shifting their focus to concerning signs in the labor market, which has historically brought broad rewards to Americans through higher wages and increased productivity One month ago, lower-than-expected July non-farm payrolls reignited concerns about economic slowdown, initial jobless claims rose, job vacancies decreased, and wage growth is slowing down. A series of soft economic data shocked Wall Street in early August, leading to a global sell-off, briefly plunging the record-breaking U.S. stock market into one of the most turbulent periods in years.
A major question in recent weeks is whether the summer market volatility is temporary, caused by the hurricane suppressing hiring, or evidence of an overall economic slowdown.
This answer is expected to be a key factor in determining the outcome of the U.S. presidential election, with U.S. Vice President Harris widely promoting an extension of Biden's agenda, while U.S. Republican candidate Trump promises to restore the U.S. economy to pre-COVID-19 levels