Fed speak does not match the market panic
Aug 6 (Reuters) -In the space of a week, we have gone from a U.S. soft landing, to recession concerns and talk of inter-meeting cuts. Despite this, Fed speak since the release of the U.S. jobs report has not matched the market panic and quite rightly so.
For starters, if the Fed were to surprise with an inter-meeting cut – which is highly unlikely – this would only exacerbate concerns in the market. The view would quickly shift to “what does the Fed know that we do not.” Recall, in 2020 when the central bank delivered its first inter-meeting cut, stocks rallied initially before quickly retracing and finishing the session lower.
The recent payrolls figures were soft, but there are caveats. Temporary layoffs picked up notably, rising to a three year high. Meanwhile, the Bureau of Labor Statistics reported that 436k non-farm workers reported to not be at work due to bad weather, which was 10 times the July average.
Additionally of note, Monday’s ISM services print, surprised on the topside of expectations, and thus would not add to the recent recession concerns.
It's clear that the market repricing of Fed policy is overextended with 112bps of easing seen by year-end, which does not chime with the tone of recent Fed rhetoric. Overnight, Mary Daly, downplayed the weakness in the payrolls report, highlighting that the data was impacted by temporary layoffs and Hurricane effects, therefore, she continues to see a balanced jobs market.
Meanwhile, Austan Goolsbee, stated that economic growth continues at a steady level, leaning against the recession viewpoint.
For now, a 25bp cut by the Fed at its September meeting looks to be the most likely scenario. However, with a weak NFP print next month, 50bps can easily become the base case.
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Fedwatch today https://tmsnrt.rs/3WAeklh
(Justin McQueen is a Reuters market analyst. The views expressed are his own.)
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