9/06/24: Measured Easing Amid Mixed Labor Market Data

The Treasury market is pricing in an aggressive monetary policy response to the softening but clearly not recessionary labor market backdrop. Focusing on month-over-month changes, Treasury yields have been on a clear downward trajectory since April 2024 with current Treasury yields at the lows of the year post the August payrolls report. Despite the Fed Funds rate remaining in restrictive territory, at a current range of 5.25% to 5.50%, financial conditions remain benign and arguably accommodative. Notably, investment grade and high yield option adjusted spreads remain relatively low compared to historical averages, allowing companies of varied credit quality continued access to the capital markets. Equity market total returns on a year-to-date basis are also comfortably positive, despite recent weakness across broad market cap indices and in several of the large cap technology sector bellwether companies.

The Chandler team has been calling for a ‘measured’ monetary policy response linked to moderating inflation and a less robust labor market backdrop. This morning’s payrolls report provided enough nuanced data to keep the debate open regarding the pace and magnitude of the coming reduction in the Fed Funds rate. The payrolls report showed jobs increasing by 142k for the month of August, an uptick from the prior month’s revised figure of 89k, but with downward revisions of 86k from the prior two months, lowering the three-month moving average on payrolls to 116k. The trend on the three-month moving average is clearly lower, with the prior month at 141k and a December 2023 reading of 212k. The unemployment rate ticked lower by one tenth on a month-over-month basis, currently at 4.2%, compared to the 12-month low reading of 3.7% last reached in January. Average hourly earnings firmed on a month-over-month basis, coming in at 0.4% compared to the prior month’s 0.2%, helping to increase the year-over-year reading on average hourly earnings to 3.8%. Other measures of wage inflation remain firm. The Atlanta Federal Reserve’s median wage growth is tracking at 4.7% annualized as of July 2024, and the ADP August employment report is showing stable annual wage growth for Job Stayers and Job Changers of 4.8% and 7.3%, respectively, unchanged from the prior month’s reading. The Federal Reserve is no longer exclusively focused on inflation and is more attuned to their dual mandate of stable prices and full employment, but annual wage inflation needs to be trending towards 3.5% to be consistent with the Federal Reserve’s 2% overall inflation mandate.

The Chandler team is forecasting the Fed Funds rate to be lowered at the September 18th meeting, but we continue to be biased towards a measured response. The softening in the employment backdrop is consistent with our outlook, and we believe a more material downturn in the labor market will be required to validate more than 100 basis points of easing through the end of the year. Given the current trends in the data and our overall macro-economic outlook, which calls for positive but below trend GDP growth, we are biased toward three 25 basis point reductions at the last three Federal Open Market Committee meetings of the year, bringing the Fed Funds range down to 4.5% to 4.75% as of December 18, 2024. Weekly jobless claims continue to point towards a healthy job market, with the four-week moving average at 230k; if this number were to climb higher, comfortably above 250k, our internal forecast would evolve, and we believe the Federal Reserve would likely pivot to a more aggressive monetary policy response.

Next Week:

Consumer Credit, CPI, PPI, Jobless Claims and UofM Sentiment

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