Asia-Pacific stock markets were mostly lower on Wednesday after U.S. stock indexes took a breather after eight straight days of gains. Investors are treading cautiously ahead of Chairman Powell's Jackson Hole speech scheduled for Friday, followed by the nonfarm payrolls report. But frankly, it's all about the next payrolls report.
How big will the Fed cut rates next month? It all depends on the August employment report. It may sound like an obvious one, but it's a point worth emphasizing. The US “growth worries” this month have shaken the thumb rule, but recent macroeconomic trends, namely falling unemployment claims and solid retail sales growth, make a 25 basis point cut at the September FOMC meeting more likely. But don't get too complacent. With four consecutive mild CPI reports, even a small increase in the unemployment rate would push the market back into the 50 basis point territory.
Even if the unemployment rate remains steady, a NFP reading below 100,000 could prompt the Fed to cut rates by 50 basis points, especially with dove-turned-hawk Neel Kashkari talking about a rate cut.
The fact that hawks like Kashkari are even whispering about a cut in less than a month is practically flashing a neon sign that says “25bps already decided.” But here's where it gets interesting: Is there enough momentum for a mega 50bps cut? At this point, the answer seems to be no, but it all depends on the labor market. If the September 6th employment report shows the unemployment rate below 125,000 and the unemployment rate rises again, the market will start pricing in a 50bps cut very quickly.
Now, let's not forget the latest survey from the New York Fed. It's data that's easy to overlook, but there are a couple of points worth noting: The percentage of respondents who have actively sought work in the past four weeks is at its highest level in the past decade, over 28%. The same survey also shows that Americans are more worried about losing their jobs than they have been since the summer of 2014, with the average expected probability of unemployment standing at 4.4%.
If you're scratching your head and wondering what on earth this survey is, you're not alone. It's conducted every four months and polls around 1,000 people about their jobs and employment outlook. It's not a top-tier data point, it's barely second-tier. Most market participants have probably never even heard of it. But if you're in the mood for a little confirmation bias to back up your labor market weakness thesis, this should do the trick.
Get ready for an action-packed day focused on the US job market. Today, the Bureau of Labor Statistics (BLS) is set to release its temporary annual benchmark revision of nonfarm payrolls through March 2024. This isn't just a data release, it's one that could shake up the markets. In June, the BLS hinted at a possible downward revision when it released its quarterly employment and wages report. Now we're waiting to see if those early warning signs will come true.
Here's the problem: The monthly NFP release relies in part on a birth-and-death model, which is essentially the BLS's guess at how many new firms will be born and how many will die. The problem is that the BLS can only provide a clearer picture once it has more accurate tax data.
Today, the first revision was released, with the final figure dropping in February 2025. Looking back at history, the number of small business bankruptcies is often underestimated when the economy starts to slow and interest rates are high. Conversely, when the economy is on the upswing, the birth rate of new businesses tends to be underestimated. Let's look at the most recent cycle: 501k was revised downward in 2019 when interest rates were high, and 462k was revised upward in 2022 as interest rates, while still relatively low, were trending upward.
There are rumors that today's revision could be as crazy as -600,000 to -1 million. But before you panic, remember this: The Fed doesn't look at labor market inflation risks solely from the NFP numbers. The key is the unemployment rate, which comes from a completely separate report. Average hourly earnings, another key inflation measure, doesn't change with the NFP revision. Moreover, the Fed has full access to labor market data and wage indicators.
