Unemployment data triggers recession indicator – London Business News | Londonlovesbusiness.com

The July US jobs report pointed to a continued cooling in labour market conditions, consistent with the signals sent recently by a range of other employment indicators.

Headline nonfarm payrolls rose just 114k on the month, towards the bottom of the forecast range, and significantly below the ‘breakeven’ pace required for employment growth to keep pace with expansion in the size of the labour force.

At the same time, unemployment unexpectedly surged to 4.3%, triggering the so-called ‘Sahm Rule’ recession indicator, though some of this rise will be down to a modest increase in labour force participation, to 62.7%.

Earnings growth, meanwhile, continues to cool, at 0.2% MoM, and just 3.6% YoY, data which is consistent with a slow but steady easing in employment conditions, and which will likely provide the FOMC with increased confidence that earnings pressures are becoming more consistent with a sustainable return to the 2% inflation target.

On the whole, there is little in this report that is likely to dissuade the FOMC from delivering this cycle’s first 25bp cut at the next meeting in September, as was hinted at in this week’s statement, and press conference, with the Committee now increasingly attentive to both sides of the dual mandate, as opposed to the prior laser-like focus solely on inflation.

Of course, there remains one more jobs report, along with two further CPI prints, before that decision, though a significant adverse data surprise would now be needed to deter policymakers from a cut next time around. Current market pricing, however, seems rather over-done, with the OIS curve now fully pricing 4 25bp Fed cuts this year.

The Committee will be careful not to over-react to one data-point, as markets appear to have done so, instead preferring to normalise policy at a significantly more gradual, and steady, pace, barring external shocks.

In turn, the likely eventual pricing out of some degree of easing which the curve now discounts is likely to provide some support for the dollar while, despite recent weakness, the supportive policy backdrop – across DM, not only in the US – should continue to see the path of least resistance lead higher for equities over the medium-term.