In a data-light week, all focus turned to the Federal Reserve’s Jackson Hole Symposium with Chair Jerome Powell’s keynote speech on Friday morning. Powell said “The time has come for policy to adjust” and “the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.” Across the FOMC Board, policymakers communicated their confidence inflationary pressures have eased and the focus should turn to maintaining labor market strength. While the confirmation was welcomed, much of the narrative had already been priced into the market with rate cut expectations largely holding steady – investors expect a 25-bps rate cut at each remaining meeting in 2024 with a greater than 50% chance of a 50-bps rate cut at the November or December meeting.
Markets have been overly eager to anticipate rate cuts in the past, but clarity provided by Powell was appreciated and reflected by the volatility index, otherwise known as the “fear gauge,” retracing to calmer levels. The S&P 500 Index advanced 1.5% last week, while the US Aggregate Bond Index moved higher by 0.7%, driven by falling short-term rates. Of note, rate-sensitive US Small Caps moved higher by 3.6% last week, as measured by the Russell 2000 Small Cap Index.
Markets Pricing in Up to Five Rate Cuts for 2024 After Weak Labor Report
Implied Number of Interest Rates Cuts Based on Federal Funds Futures
Source: Bloomberg.
Powell highlighted a “cooling labor market,” which had caught investors’ attention earlier in the week. The Bureau of Labor Statistics’ preliminary payroll revisions revealed US job growth was significantly weaker for most of the last year than previously reported. For the 12 months through March 2024, payrolls were adjusted lower by 818k—or around 68k less each month—in the largest downward revision since 2009. At the sector level, the largest downward revision came in professional and business services, where job growth was 358k less than initially reported.
The BLS report suggests the labor market started moderating much sooner than originally thought. Based on Powell’s comments, the Fed is focused on the labor market and will do whatever it can to avoid a pronounced slowdown. Data seems to be coalescing around a soft-landing narrative, but a quick reduction in rates could foreshadow economic weakness on the horizon.
Revision Suggests More Moderate US Payroll Growth
Preliminary payroll revisions
Source: Bureau of Labor Statistics, Bloomberg.
Finally, on the job front, an uptick in initial and continuing unemployment insurance claims corroborated the payroll revisions. Traditional seasonal effects and weather interruptions added volatility to the summer data, but the slower return to work points to businesses being more thoughtful about managing headcount. Initial unemployment claims increased by 4k to 232k, while continuing claims increased to 1.863M — also 4k higher than the week prior. The rate of change may be slow, but the trend is a greater concern to policymakers looking to engineer the soft landing.
Claims Climb Again, Corroborating Softening Labor Market
New vs Initial Jobless Claims
Source: Bloomberg, US Department of Labor
– Written by Eric Schmitz, CFA