The jobs report that could change Fed interest rate cuts

Investors and economists are anxiously awaiting the beginning of a cycle of rate cuts, with the first one expected on September 18. However, the pace and size of these cuts will largely hinge on key U.S. economic data, particularly labor market and inflation reports.

The August 2024 employment report, which will be released on September 6, is one of the most closely watched indicators and will be essential in guiding market expectations for the Fed's rate decisions. This is especially significant after the substantial downward revision of payroll numbers for the 12 months ending in March 2024. Previous reports had overstated job growth by 818,000 positions.

In addition to the jobs report, other labor market metrics will be critical for determining future Fed policy. For example, the July 2024 Job Openings and Labor Turnover Survey showed that job openings have softened but remain robust, with nearly 7.7 million openings reported in July. Although this figure has been declining since March 2022, there are still 700,000 more openings than there were before the pandemic.

Weekly jobless claims have also remained low, playing a smaller role in influencing Fed decisions compared to the monthly jobs report.

Before Fed Chair Jerome Powell's speech at the Jackson Hole Economic Symposium on August 23, the CME FedWatch tool indicated a 71.5% chance of a 0.25% rate cut and a 28.5% chance of a 0.5% cut. Since then, the likelihood of a 0.5% rate cut has increased notably. As of September 4, the tool showed a 45% probability of a 0.5% cut on September 18, though a 0.25% cut remains more likely at 55%.

The outcome of the August jobs report could significantly shift expectations. If the report on September 6 shows weaker-than-expected results, the probability of a 0.5% rate cut will likely increase, which could weaken the U.S. dollar while boosting equities, bond prices, industrial metals, and oil. On the other hand, a strong jobs report could reduce the likelihood of a larger rate cut, strengthening the dollar but putting pressure on equities, bonds, and commodity prices.