Bank of America sends bold message on looming jobs report

Bank of America Global Research anticipates a cooling labor market in the upcoming June jobs report, forecasting nonfarm payrolls at 95,000 (below consensus) and an unemployment rate increase to 4.3%. Despite this moderation, BofA concludes that elevated inflation will likely keep the Federal Reserve on hold, making a July interest rate cut improbable, a sentiment echoed by the CME FedWatch Tool which assigns only a 21.2% probability.

Analysis

Bank of America Global Research forecasts a significant cooling in the U.S. labor market, projecting the upcoming June jobs report will show the creation of only 95,000 nonfarm payrolls, which is below the consensus estimate of 110,000 and a deceleration from May's 139,000 additions. BofA also anticipates the unemployment rate will tick up to 4.3% from 4.2%. This expected slowdown is attributed to both seasonal factors and structural weaknesses, including reduced hiring in education, health, and leisure & hospitality. Despite these signs of a moderating labor market, the Federal Reserve's path remains constrained by persistent inflation, which Fed Chair Jerome Powell cited as the primary reason for holding the Federal Funds Rate at 4.25%-4.50% in June. While some Fed Governors have hinted at a possible July cut if inflation proves transitory, BofA's view is that elevated inflation will keep the Fed on hold. This aligns with market-based expectations, as the CME FedWatch Tool indicates only a 21.2% probability of a rate cut at the July FOMC meeting, highlighting a prevailing tension between a slowing economy and the Fed's mandate to control inflation.

Key Decisions for Investors

• Given that Bank of America and market pricing suggest the Fed will prioritize inflation over a cooling labor market, investors should consider positioning for a 'hawkish hold' in July, which may disappoint equities hoping for imminent easing.
• The upcoming jobs report is a critical catalyst; a payroll number significantly below the 95,000 forecast could rapidly increase rate cut probabilities, while a stronger number would likely solidify the Fed's 'on hold' stance.
• Monitor inflation data as the primary driver for future Fed action, as weakness in the labor market alone appears insufficient to trigger a rate cut according to the prevailing analysis.
• Expect heightened market volatility around the jobs data release and the July FOMC meeting due to the conflicting economic signals and differing opinions among Fed officials.