Fed: An on the Mark NFP

Published on October 4, 2019

Despite some initial reporting on this morning’s Non-Farm Payrolls numbers as weak, we doubt anyone on the Federal Open Market Committee will see the print as anything other than right on the mark with the current base case forecast for slowing but still solid economic growth through the second half of this year and into 2020.

** Dialing back to a previous report (SGH 9/26/19, “Fed: Disparate Perspectives”), we think this morning’s decent employment data pulls the probabilities for an October rate cut back to even at best. While rate cut odds are no doubt higher in the wake of the forward-looking ISM prints earlier this week, they alone, even with the weaker service ISM, are probably not enough without a weaker NFP (even if backward looking) to indicate a deepening spillover of the manufacturing weakness into the broader economy.

** On that, the NFP’s upward revisions of previous months added a little muscle to the 136,000 jobs created which, while slowing, is still well above the breakeven; it is a bit of a stretch to read too much into a single month of the weaker than expected wage growth after the previous months of strong wage gains; and, in any case, it is going to be difficult to make a pressing case for a rate cut when the headline unemployment rate is all the way down to 3.5%.

** Indeed, unless the retail sales or PCE data later this month turns sharply south, or the trade wars markedly worsen, the preference among a majority of the FOMC, including the voters, probably remains to keep the focus in October on the balance sheet and the decisions to the near certain resumption of its “organic” growth, the size of the reserve “cushion,” and by how much and for how long the Desk will be purchasing treasuries.

** And if the market takes the “technical” balance sheet expansion as a “QE-lite,” so be it, for as far as the FOMC is likely to take it, however marginal the additional accommodation, it may be just enough to allow them the running room to see the data in the run-up to the December meeting before making a rate decision depending on the outlook into 2020.

** And as one last point, as we wrote yesterday (SGH 10/3/19, “Fed: October Judgment Call”), a 50 bp rate cut would on the table in either October or December, if the FOMC votes that more accommodation is needed and, crucially, that a tipping point has been crossed in recession risk probabilities. But on the data to date, we would doubt any of the FOMC think the economy is anywhere near that point.

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