Rise and shine everyone.

It’s Jobs Friday and now that the Fed’s focus has turned to the labor market, this is the most important data point for the market… ever. I jest, but the market is likely to be quite volatile today, so please be careful. The data will be released at 8:30 am ET.

The recent JOLTS readout showed us Job Openings are falling but if we zoom out, we see that we are still above pre-pandemic levels and we still have 1.1 jobs per unemployed person. To quote the Fed: “The Labor Market is now back in better balance” and the weakness is still not alarming.

We also got the jobless claims yesterday - and both initial and continuing claims came in below expected. Initial claims actually hit a 7-week low. But as always, we want to look at the 4-week average (grey line below) and there’s no mistake that the trend is lower, i.e., fewer people are claiming unemployment insurance. But, we do want to point out that not everyone is signed up to claim such insurance.

For today’s report, we will focus on the Unemployment Rate or the Household Survey– this is what the Fed usually focuses more on because it counts the number of people employed. The NFP is tougher to gauge as it gets revised more often, and it also counts jobs, so there could be some double counting there. The household survey has no duplication of individuals, because individuals are counted only once, even if they hold more than one job.

The estimates for NFP are apparently lowest in a while at 165k, which is still higher than last month’s print of 114k. The Unemployment rate is expected to move down to 4.2%. Last month’s print was much lower than expected particularly because of Hurricane Beryl.

What could make the Fed cut 50bps? An unemployment rate above 4.8% would have them seriously considering this, given that the long-term average is about 5.5%.

While they are “confident” that inflation is trending lower, they are still not completely out of the woods, and ushering in a jolt to the US Dollar with a 50bp cut could set them off that disinflation path. A jumbo cut could also send the message that they’re trying to play catch up here, and of course, there’s the political implication so close to the election.

In fact, the Jackson Hole speech was right after the yearly NFP revision data and while Chair Powell warned about supporting the labor market, he still didn’t suggest that there was cause for panic. If unemployment weakens from here on out and economic growth slows more than expected, there is plenty of headroom in the Fed Funds Rate to speed up cuts.

Market Reaction - My views

• If the numbers come out better than expected, i.e., more jobs created; lower unemployment rate - Negative market reaction and then Positive. Traders will price in fewer cuts, i.e., 25bps, and that will cause yields to rise initially.

• If the numbers come out slightly worse than expected, i.e., fewer jobs created; higher unemployment rate - Negative market reaction and then Positive. The initial reaction will likely price in the bad news, and then start to price in lower yields because they will expect a 50-bp cut.

• If the numbers come out much worse than expected - Bad news will be bad news. The market will take this to mean the Fed is far behind the curve, and the economy is deteriorating much faster than expected. Over 100 bps of cuts will likely be priced in for the rest of the year and yields may decline quite a bit.

We have two Fed speakers today - the last before the Fed’s quiet period, so they will be the ones to watch.

Markets are lower across the board this morning, continuing from yesterday. Broadcom’s earnings saw the stock sell off after hours, and in the pre-market today. The guidance was softer. Nvidia’s following that as well.

The OPEC+ has decided to delay their increase in production until December. The consortium was carrying a higher level of voluntary cuts, to keep a floor under oil prices and had announced rolling back these cuts by the end of September. But, given the decline in demand estimates and China growth worries, they have decided to delay the decision so oil prices don’t slump. Not a big impact on crude prices this morning. WTI is barely above $69/bbl.

Here’s my appearance on Bloomberg this morning covering today’s forthcoming jobs data release.

Chart of the Day - BofA’s Flow Show and Charts from the report

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)