A stronger than anticipated US labour market report for June has effectively extinguished any lingering expectations for a Federal Reserve rate cut in July. The addition of 147,000 jobs, comfortably ahead of the 110,000 consensus forecast, prompted an immediate and sharp repricing in interest rate futures, with the probability of a near term policy change collapsing.
Key Takeaways
- The June Non-Farm Payrolls report showed a headline beat of 147,000 jobs versus a 110,000 estimate, pushing the unemployment rate down to 4.1%.
- Despite the strong job creation, wage pressures showed signs of moderation, with Average Hourly Earnings growth slowing, complicating the policy signal for the Federal Reserve.
- Markets reacted by pricing out a July rate cut almost entirely, driving short term Treasury yields higher and strengthening the US Dollar.
- The key discrepancy between robust employment and softening wages suggests the Fed has room to remain patient, making the September meeting the next critical decision point.
A Deeper Dive into the Data
While the headline figure captured attention, a granular analysis of the report reveals a more nuanced picture of the US labour market. The strength in job creation was accompanied by a welcome moderation in wage inflation, a critical input for the Federal Reserve’s policy calculus. Average Hourly Earnings rose by a modest 0.2% month over month, a deceleration from the prior period and a signal that wage pressures, a key driver of services inflation, may be abating. This detail is arguably more significant for the Fed’s outlook than the headline jobs number itself.
Furthermore, revisions to prior months subtracted a net total from previous reports, slightly tempering the overall strength. The labour force participation rate remained steady, indicating no significant change in the supply of workers. The combination of a resilient but not overheating jobs number, coupled with disinflationary wage trends, presents a complex but ultimately favourable scenario for policymakers hoping for a soft landing.
| Metric | June 2024 Actual | Consensus Forecast | May 2024 Figure |
|---|---|---|---|
| Non-Farm Payrolls | +147,000 | +110,000 | +139,000 |
| Unemployment Rate | 4.1% | 4.2% | 4.2% |
| Average Hourly Earnings (MoM) | +0.2% | +0.3% | +0.4% |
| Average Hourly Earnings (YoY) | +3.9% | +4.0% | +4.1% |
The Federal Reserve’s Policy Conundrum
This report places the Federal Reserve in an enviable position of patience. The data provides little impetus to act urgently in either direction. The persistent strength in hiring removes the need for an immediate stimulus, allowing the central bank to continue monitoring the lagged effects of its previous tightening cycle. Conversely, the clear moderation in wage growth alleviates pressure to adopt an even more hawkish stance to combat inflation. In essence, the June jobs report has bought the Fed more time.
The narrative now shifts firmly to the outlook for the September meeting. Officials will have two more employment and inflation reports to digest before then. They will be looking for confirmation that the trend of moderating wage growth continues, alongside further evidence that core inflation is returning sustainably to its 2% target. The bar for a July cut was always high; it is now practically insurmountable. The bar for a September cut remains, but depends entirely on the data flow over the summer.
Implications for Asset Allocation
The market’s reaction was textbook. Short duration Treasury yields, such as the 2-year note, rose to reflect the diminished prospect of imminent rate relief. The US Dollar Index also found support. For equity investors, the implications are more complex. A ‘higher for longer’ interest rate environment typically acts as a headwind for growth oriented sectors with long duration cash flows, such as technology. Conversely, financial institutions may benefit from a steeper yield curve if long term rates rise in tandem.
This environment suggests a cautious and balanced approach to portfolio construction. A focus on quality companies with strong balance sheets and demonstrable pricing power seems prudent. In fixed income, the appeal of shorter duration bonds has increased, offering attractive yields without the significant interest rate risk associated with longer term debt.
A Contrarian Hypothesis
Looking forward, the consensus has coalesced around a ‘wait and see’ approach from the Fed. However, a potential scenario being overlooked is one where the market is focusing too heavily on the resilient employment headline and not enough on the disinflationary wage impulse. Should subsequent inflation reports, particularly the Personal Consumption Expenditures (PCE) index, show a significant and surprising decline, the rationale for holding rates at restrictive levels would weaken considerably.
Therefore, a contrarian might posit that the market is underpricing the probability of a September rate cut. If the labour market remains solid but non-inflationary, and price pressures continue to ease, the Fed could seize the opportunity to pivot sooner than currently anticipated. Such a move would likely catch hawkishly positioned participants off guard, triggering a significant rally in both equities and bonds.
References
ActionForex. (2024, July 5). *US NFP Growth Solidly by 147k in June, Wage Pressures Ease*. Retrieved from https://www.actionforex.com/live-comments/603058-us-nfp-growth-solidly-by-147k-in-june-wage-pressures-ease
BitcoinEthereumNews.com. (2024, July 5). *NFP Set to Show Hiring Continued to Moderate in June*. Retrieved from https://bitcoinethereumnews.com/finance/nfp-set-to-show-hiring-continued-to-moderate-in-june
MarketPulse. (2024, July 5). *July Non-farm Payrolls Preview*. Retrieved from https://marketpulse.com/markets/july-non-farm-payrolls-preview
Yahoo Finance. (2024, July 5). *June jobs report expected to show hiring slowed while unemployment rate ticked higher*. Retrieved from https://finance.yahoo.com/news/june-jobs-report-expected-to-show-hiring-slowed-while-unemployment-rate-ticked-higher-192105752.html
@StockSavvyShay. (2024, July 5). [Post showing Polymarket odds and NFP data]. Retrieved from https://x.com/StockSavvyShay/status/1929885770225201278
