Since the beginning of this week, the employment data released by the United States has been sending weak signals: the JOLTS job openings for July, announced on Wednesday, unexpectedly weakened to the lowest level since early 2021, the ADP new employment figure for August, announced overnight, unexpectedly dropped to the lowest level in three and a half years, and the latest initial jobless claims data also fell short of expectations.
This has reignited expectations for a 50 basis point rate cut. Currently, the interest rate swap market pricing shows that the likelihood of the Federal Reserve making a significant rate cut in September is about 35%, with investment banks such as Citigroup and JPMorgan betting on a 50 basis point cut.
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Matthew Raskin, head of U.S. interest rate research at Deutsche Bank, said that the uncertainty will end with the release of the August non-farm employment report tonight:
"If the market's implied expectations decisively shift towards one outcome or another, then betting on a 25 basis point swing would mean: making a little or losing a lot. Betting on 50 basis points would be the opposite."
Wall Street expects: a rebound in August non-farm employment, with a decline in the unemployment rate
Currently, the median forecast in the Bloomberg economist survey shows that the number of non-farm jobs in August may increase significantly from 114,000 in the previous month to 165,000, and the unemployment rate is expected to slightly decrease from 4.3% to 4.2%, indicating a moderate recovery in the labor market, which in turn would suppress expectations for a 50 basis point rate cut.
Bank of America economists Shruti Mishra and Aditya Bhave said in a report:
"The slowdown in the labor market is gradual. Overall, we expect that compared to the unusual report in July, the August report will bring some comfort."
Some media opinions point out that the optimistic attitude towards the August non-farm report is largely based on the fact that the unemployment rate in July was largely driven up by a 30.6% surge in the number of workers who were "temporarily laid off," a phenomenon that has only occurred 6 times in the 57-year history of this data, and is expected to reverse in August.
Bloomberg economist Anna Wong also said that the turning point for the upward trend in the unemployment rate has arrived:"Over the past few months, the labor market has cooled rapidly — we believe that the inflection point of sustained rising unemployment has already passed, and the Federal Reserve and the market have yet to realize this."
Citi stated that if the U.S. unemployment rate falls from 4.3% to 4.2% in August, then the Federal Reserve may only cut interest rates by 25 basis points, "unless wage growth is also weak."
The interest rate swap market may face a significant shock
It is noteworthy that on the day following the release of the August non-farm employment report, the Federal Reserve will enter its routine quiet period.
Deutsche Bank analysis pointed out that over the past 15 years, the rate expectations implied by swap contract prices at the start of the Federal Reserve's quiet period have only differed by 3 basis points from the final rate decision.
Therefore, if the non-farm data clearly indicates that the Federal Reserve will cut rates by 25 or 50 basis points, given that the market has currently digested a rate cut of 34 basis points, the rate cut implied by the swap prices may narrow to 28 basis points or expand to 47 basis points, causing significant market fluctuations.
RJ O'Brien derivatives broker Alex Manzara estimated that the pricing yield level of two-year U.S. Treasury futures options will fluctuate by about 17 basis points on Friday.
Raskin also added that if the non-farm data does not lock in a cut of 25 or 50 basis points, the August CPI, scheduled to be released on September 11, can still provide guidance.
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