Taken as a whole, this week's US labour market data, including today's Employment Report, gives the FOMC enough cover to start easing with a 50bp cut on September 18th. But there are a few reasons why they may not want to be that bold.
The economic one is that this is more of a productivity story than a recession story: the economy is growing steadily even as jobs growth slows. The political one is that that the Presidential Election on November 5th is still a toss up. And the outcome could be very material for inflation, growth and asset prices. The FOMC will also have 2 more months worth of employment and inflation data by the time they meet on November 6th and 7th. If in doubt, waiting for more data is usually a good strategy. And finally, a 50bp cut up front would be tantamount to admitting they should have started easing a while ago. (One might add that should Trump win, cutting 50bp at the November meeting might make more political sense that it would in September).
That's enough to make us think they will do 25bp not 50bp at the next FOMC meeting and that there is little prospect that the Fed will cut more than 100 basis points this year. Meanwhile, we thinks there is meaningful downside risk for equities, the dollar - and potentially for rate cuts in 2025 - should Trump win in November. We certainly don't buy the idea that Harris is now the clear favourite, Alan Lichtman notwithstanding. (For what it's worth, Predictit has Harris 53 cents to Trump 50, while Polymarket has Trump 51 to Harris 47. Nate Silver, who is as careful as they get with the data also thinks the election is a toss up).
So our conclusion after this week's data is that during the next 2 months market attention will switch to political risk rather than economic fundamentals - which leaves plenty of downside risk for the US currency and equities, but not that much upside potential for bonds.
In the meantime the charts below help summarise why the Fed has plenty of cover to ease quite aggressively, but also why they probably don't need to.
The growth rate of private non-farm payrolls reached a 14-year low, growing at just 0.9% on the quarter (annualised rate), well below the non-recession average. The caveat is that employment growth in Q2 was probably overstated and potentially under-stated in Q3.
2. Average hourly earnings (nominal) grew relatively relatively strongly over the 3 months to August, but unit labour cost growth is well below 1% year over the past year with productivity picking up again. That provides the Fed with a very powerful signs that inflation is indeed headed back towards 2%.
3. Not only was productivity pretty robust over the past year (+2.7%) but the longer view supports our contention that this could be just the start of a new regime of faster growth.
And finally, to support the view that the economy overall continues to grow at a steady pace our weekly GDP tracker suggest underling GDP growth remains around 2.5-3% per annum going into the autumn.
Short summary: productivity and profits are doing fine for now, and the jobs slowdown is probably not quite as dramatic as the payrolls data paints it.
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