Citi Projects NFP at 125,000, Leading to 50bp Rate Cut from Fed

Citi analysts reported in a client note on Tuesday that they anticipate the upcoming Non-Farm Payroll (NFP) report will show an addition of 125,000 jobs and an unemployment rate of 4.3%.

The analysts emphasized that the focus has shifted from inflation metrics to employment data, which will influence Federal Reserve policy decisions. They argue that job growth of 125,000 alongside a 4.3% unemployment rate would be soft enough to encourage the Fed to lower interest rates by 50 basis points.

Citi also indicated that if the unemployment rate were to decrease slightly to 4.2%, the Fed might consider a smaller rate cut of 25 basis points. However, this development would not change Citi’s broader perspective on the ongoing weakening of the labor market and the overall economic slowdown.

The bank noted that fluctuations in the labor market have become increasingly comparable to those seen in inflation data in recent years. They highlighted that even minor changes in the upcoming jobs data could significantly impact Fed policy.

For example, they suggest that if the unemployment rate remains at 4.3% but payroll growth improves to around 175,000, the Fed is likely to pursue a 50 basis point rate cut. On the other hand, if payroll growth falls below 125,000 while the unemployment rate is at 4.2%, a larger rate cut could be considered.

Citi also observed that the broader trends in the labor market point to a consistent weakening, characterized by slower hiring, reduced hours worked, and rising unemployment. They pointed out, “History shows that once the cycle of weakening begins, it typically leads to a recession.” The upcoming jobs report, along with the JOLTS data, will be critical in assessing whether this trend continues.