US jobs growth beats all expectations

In terms of what this means for the Fed next week – well it confirms that the Fed will be pushing back rate cut projections from 3 cuts this year and 3 cuts next year to most probably 2 cuts this year and 4 next, but we can’t rule them out saying just one for this year. The market pricing for September has gone from 20bp down to 15bp while cumulative easing by December has gone from 49bp to 40bp.

We are still looking for a September cut, but we need to see three things.

We need more evidence of inflation pressures easing. We have had a 0.2% on the Fed’s favoured measure of inflation, the core PCE deflator, and if we can get two or three more in quick succession that will be a necessary, but not a sufficient factor that leads to a rate cut.

We need to see more evidence of labour market slack. The unemployment rate has gone from 3.4% to 4%. If that moves convincingly above 4% with more evidence of a cooling of wages this too will help swing the argument in favour of rate cuts.

We need to see a softening of consumer spending, the primary growth engine in the US. There was some evidence of that in 1Q GDP revisions and weak April spending data, but the Fed needs to see more.