US Employment Not Hot... Will Fed Take Baby Step or Big Cut in September?

Ministry of Labor Lowers Annual Nonfarm Payrolls by 810,000
Largest Employment Revision Drop in 15 Years
Focus on Powell's Jackson Hole Speech on 23rd... Key to Rate Cut Size

The annual scale of new employment in the United States has been significantly revised downward, revealing that the labor market was not as hot as initially expected. As expectations for the Federal Reserve's (Fed) first interest rate cut, anticipated in September, gain more weight, market attention is shifting to the size of the rate cut.

On the 21st (local time), the U.S. Department of Labor announced that the number of new nonfarm jobs from April last year to March this year was 818,000 fewer than previously reported.

As a result, the average monthly new employment during this period was revised down from 246,000 to 178,000, a decrease of 68,000 jobs, or 27.6%. This downward revision of nonfarm payrolls is the largest in 15 years since 2009 (824,000 jobs).

This revision revealed that U.S. new employment figures were overstated by more than 800,000 jobs in the statistics, confirming that the labor market is slowing down faster than initially expected. Market concerns about employment began in earnest earlier this month with the release of the July employment report. According to the report, July nonfarm payrolls were only 114,000, and the unemployment rate jumped from 4.1% in June to 4.3%.

With U.S. employment falling short of expectations, the outlook for the Fed to start cutting rates in September is becoming a foregone conclusion. At last month's Federal Open Market Committee (FOMC) meeting, the Fed kept rates steady at 5.25-5.5% for the eighth consecutive time, signaling a pivot by stating it would focus not only on price stability but also on achieving full employment.

Investors expect a 0.75 to 1 percentage point rate cut within the year. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market on this day priced in nearly a 100% probability that the Fed will cut rates by at least 0.25 percentage points in September. The key issue is the size of the cuts this year, with attention focused on whether the Fed will make one or more big cuts (0.5 percentage point rate cuts) at the three scheduled FOMC meetings in September, November, and December. The market currently reflects a 75.9% probability that the Fed will take two baby steps (0.25 percentage point cuts) and at least one big cut within this year.

Market eyes are turning to the annual economic policy symposium, the Jackson Hole Meeting, held in Wyoming from the 22nd to the 24th. There is growing anticipation that clues about rate cuts and the size of cuts within the year will be found in Fed Chair Jerome Powell's speech scheduled for the 23rd.

Robert Frick, corporate economist at the Navy Federal Credit Union, said, "Considering that there were even observations that employment could decrease by 1 million, this revision is not shocking," but analyzed, "(The nonfarm payroll revision) suggests that monthly new employment will decline further, which signals additional pressure on the Fed to cut rates."