Decent US Job data keeps Powell consistent in Zurich


The pace of US payrolls moderated from 159K in July-2019 to 130K in August-2019 against expectations of 150K reading. The moderation in the pace of jobs growth is perhaps an indication that the momentum of US growth is slowing. Moreover, there were some areas of concern:

  1. Private sector payroll growth dropped sharply from 131K in July-2019 to 96K in August-2019 with the bulk of the decline coming from the private service providing industries.
  2. A weaker labour market in the service sector remains a source of concern given that the sector is the back-bone of the US economy and the main source of job increases.
  3. While there was a marginal improvement in job additions witnessed in the goods-producing industries, the main reason for the improvement was growth seen in the construction sector. Other goods producing industries such as manufacturing and mining remained weak.

On Friday itself, Powell spoke in Zurich, Switzerland.  Following key points came out from his speech and reading between the lines:

  1. He repeated the Fed's refrain that it will act as appropriate to sustain the expansion. That's something any Fed Chairman could have said any time in history and it wouldn't change the picture. 
  2. Powell talked about how the relationship between economic tightness and inflation has faded. He also highlighted that inflation is especially well anchored. This is an important long-term shift because it suggests that even if the trade war ends, the Fed now realizes that it doesn't need to keep rates as high. 
  3. Powell highlighted that central banks don't have much experience working through trade disputes. The subtext there is that they might be overreacting but that it's the proper thing to do in terms of risk management.
Powell knows that a rate cut is fully priced in. The central bank goes into the blackout period this weekend and this was the final word. He didn't push bank against the market, which is an acknowledgement that a cut is coming. He also didn't push towards 50 bps. We think a 25 bps move is a done deal now and the market reaction should be all about how things move after Sept FOMC meeting as market is pricing in 66% probability of another rate cut by 2019-end.

 Most of the pre-requisites for a rate cut such as softness in manufacturing growth, uncertainty about ‘trade-wars’ and inflation remaining well below the FOMC’s target remain firmly in place. The moderation of the pace of payroll growth will work as another reason that will work to force the Fed to remain cautious by resorting to more accommodation.

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