The publication of the US employment report in July caused a strong reaction on the markets, with a drop in 27 basic points of the Treasuries rate at 2 years.
Although the job creations in July come out slightly below expectations ( +75,000 against +100,000 expected), the main factor in this reaction is the decreasing revisions of the previous two months: the figures in May and June were revised downwards of 258,000 jobs in total, leaving only net gains of +14,000 and +18,000 respectively. According to the Bureau of Labor Statistics (BLS), these revisions are explained by a slower response than to the usual of companies to the survey, making the first estimates less reliable. This suggests that the labor market could have been significantly lower than initially estimated.
We consider this development as significant, because it potentially calls into question the recent story of a resilient economy – a vision hitherto largely supported by the Fed in recent months. This new signal clearly reopens the door to a drop in rates in September, a scenario that still seemed very uncertain after the July FOMC meeting. It could even rekindle extreme scenarios, such as a decrease of 50 base points, if the slowdown in the labor market was to be confirmed in the next data. Recall that the Fed repeatedly repeated that it would react firmly in the event of sudden deterioration of the job market.
That said, it is also possible that the slowdown observed in May and June is only temporary, perhaps linked to uncertainties around commercial policies, which have partially dissipated with the conclusion of recent agreements.
Another element of caution concerning a rapid reaction from the Fed to figures published on Friday lies in the way in which it interprets this data. During his press conference last week, President Powell stressed that the Committee expected a moderation of job creations, and now attaches more importance to the unemployment rate, which increased only modestly, going from 4.12% to 4.25%. From the point of view of the Fed, the labor market can therefore still appear balanced, demand and supply of slowing up in concert.
Furthermore, the announcement of the departure of Governor Adriana Kugler also contributed to the decline in rates, by paving the way to an appointment anticipated by President Trump of a member potentially more favorable to a policy of lower rates.
We currently reassess our exhibitions in light of these developments and review our anticipations of monetary policy for the September meeting.