US: We now expect a 50bps Fed cut in September – Standard Chartered

August non-farm payrolls rose just 22k, significantly missing the 75k consensus, while the unemployment rate climbed to 4.3%, signaling a rapid softening of the US labor market. This unexpected weakness, a stark contrast to recent Fed characterizations, has prompted Standard Chartered economists to forecast a 50bps rate cut at the September FOMC meeting, despite current market pricing reflecting only a 28-29bps adjustment, drawing parallels to a similar Fed response last year.

Analysis

The August non-farm payrolls report signaled a significant and unexpected softening in the U.S. labor market, with headline job growth of just 22k falling dramatically short of the 75k consensus estimate. This weakness was corroborated by below-consensus average weekly hours and hourly earnings, and a notable increase in the unemployment rate to 4.3%, a level that breaks a 15-month range and was last seen in 2021. This rapid deterioration, occurring in less than six weeks since Fed Chair Powell described the labor market as “solid,” has prompted Standard Chartered economists to revise their forecast for the September FOMC meeting from a 25bps to a 50bps 'catch-up' rate cut. This outlook is notably more dovish than current market pricing, which implies only a 28-29bps cut. The analysts justify their aggressive call by arguing that headline data understates the slowdown due to distortions from the birth-death adjustment, and they anticipate their view will be reinforced by preliminary employment data revisions due next week.

Key Decisions for Investors

• Investors should assess positions sensitive to short-term rates, as a significant divergence exists between market pricing of a 28-29bps Fed cut and the analyst call for a more aggressive 50bps 'catch-up' cut in September.
• Pay close attention to the upcoming preliminary employment data revisions, as these are flagged as a critical near-term catalyst that could validate the 50bps rate cut thesis and trigger a repricing in fixed income and currency markets.
• Consider adjusting exposure to assets that benefit from falling rates and a weaker dollar, such as gold, given the sharp deceleration in the labor market and the potential for a more dovish-than-expected Federal Reserve.
• Look beyond headline payroll numbers and focus on underlying metrics like the employment-population ratio for a more accurate gauge of labor market health, as the birth-death model may be distorting the true extent of the slowdown.