August Jobs Report to Validate July Weakness, Prompting 50 Basis Point Rate Cut by Fed

The August jobs report is expected to confirm that the labor market’s weakness observed in July is not a temporary situation, leading to the Federal Reserve initiating a cycle of rate cuts, according to economists at Citi.

Citi anticipates that the upcoming report will be similar to July’s, indicating a genuine softening in the labor market, which could prompt officials to reduce rates by 50 basis points as a start to the easing cycle. With a rate cut in September now widely expected, there is considerable debate regarding the size of the cut, with varying odds for both a 50 basis point and a 25 basis point reduction.

In the wake of the disappointing July jobs report, many believed the Fed would need to implement a larger cut of 50 basis points to avoid a recession, with some advocating for an emergency cut. However, as positive data, including jobless claims, emerged, initial recession fears lessened, shifting focus towards a potential 25 basis point cut.

Citi notes that only slight changes in economic conditions would sway considerations toward a more substantial 50 basis point cut, forecasting an increase of 125,000 jobs in August, with the unemployment rate remaining steady at 4.3%. This aligns with their perspective that labor demand is genuinely declining and not merely influenced by temporary factors.

Even if the unemployment rate decreases slightly, indicating a small, one-month improvement in the labor market, it may not be sufficient to persuade Fed officials that the risks of further weakening have diminished. Citi emphasizes that the weaker nonfarm payrolls seen in July indicate ongoing challenges in various sectors like construction, government, and manufacturing, which will likely impact the August jobs report.

The August jobs report, scheduled for release on September 6, will significantly affect the Fed’s decision-making as it falls just before the September blackout period. Citi believes the data will play a crucial role in determining whether the Fed opts for a 25 or 50 basis point cut to commence its easing cycle.