Key Takeaways
- Following weak August numbers and downward revisions to earlier data, the narrative around the US labour market is shifting. Unemployment is higher than job openings.
- This week’s Federal Reserve meeting looks set to rubber stamp a 25-basis point cut in rates. Some members will likely vote for a higher cut.
- Markets are pricing in 140 basis points in interest rate reductions over the next 12 months. Without a recession this sort of level seems optimistic.
- Equity markets continue to focus on the positives. Assuming a soft-landing and with rate cuts looming, we see scope for further progress.
The past couple of weeks have seen a marked change in narrative around the US labour market. We have known for some time that there has been softening at the margin, but August’s weak non-farm payrolls combined with revisions for the year to March 2025 now point to the US labour market being a lot weaker than expected. Downward revisions of 911,000 jobs in the year to March 2025 suggest that there have probably been three negative payroll prints in the past 18 months, and for the first time since 2021 unemployment is higher than job openings. We now have 7.4 million people unemployed in the United States and only 7.2 million job openings. It is also clear that both the demand and supply of jobs is on the wane. Companies are not yet firing people, but they’re also not hiring. It is possible the labour market is not loosening as much as previous cycles because labour supply is lower thanks to less migration.
All this sets the tone for a very interesting Federal Reserve meeting this week – markets are pricing in a 100% probability of a 25-basis point rate cut, but the associated communications may be interesting given that we have already seen splits in Fed voting. There are expectations that some members may vote for larger rate cuts. The data around inflation is settling around 3% – above target, but we haven’t yet seen a huge amount of inflation pass through from tariffs. There are, however, signs that inflation is trending higher in core goods, which is where the tariffs will likely show up. Although core goods is a relatively small part of the inflation basket (around 19%), the direction of travel in the underlying data is higher.
With a 25-basis point cut all but guaranteed, markets are pricing in a total of 140 basis points of reductions over the next 12 months. That seems optimistic – normally we get that level of cuts during a recession. Is the US going into recession? Certainly, the data currently doesn’t suggest that, so maybe markets need to be careful what they wish for. That said, the Fed leadership and the make-up of the board will be changing. We are likely to have a new Fed chair announced before Christmas and the wider board is also set for change with a more dovish – and President Trump-friendly – view on rates.
So, we are likely facing slightly higher US inflation and higher US unemployment. With the Fed set to cut interest rates we may well see a potent backdrop for equities assuming the soft-landing scenario plays out. Equity markets are finding all the positives right now with the S&P500 again hitting record highs last week.
