August Payrolls Preview: 25bps Or 50bps Rate Cut

While it is common knowledge by now that the Fed will cut rates by 25bps on Sept 18, the question remains whether the cut will be 25bps or 50bps. The answer will be determined by Friday's nonfarm payrolls report. Let's dig in.

First, the big picture.

Just a few weeks after the Kamala Dept of Labor, in a epically botched release, unveiled that it had overestimated jobs by 818K in the past year, effectively making every monthly report a "miss" to expectations in retrospect, Friday's headline payrolls print is expected to come in at 165k, rising from the prior 114K, but below recent averages, with the unemployment rate forecast to tick back lower, after unexpectedly jumping last month. And while this highly inaccurate data set will be likely revised lower both next month and over the next year, it remains of paramount importance for the FOMC meeting on September 16th, where the Fed's attention has fully shifted towards the employment side of its mandate, and this report will guide the magnitude of the rate cut at that confab. At Jackson Hole Chair Powell said “the time has come for policy to adjust”, with emphasis on the labour market, especially after the July jobs report, adding "we do not seek or welcome further labor market cooling." As such, WSJ’s Timiraos noted that a report as weak as July could result in an upsized cut, and while currently, money markets are fully pricing in a 25bps rate cut, they have assigned a probability of around a 40% of a 50bps reduction.