"The Fed's favorite employment indicator" collapsed, will there be a 50 basis point rate cut?

As the market anxiously awaits the heavyweight non-farm payroll data this week, the "Fed's favorite employment indicator" has already thrown a big surprise, reigniting expectations for a bold 50 basis point rate cut by the Fed in September.

Citigroup analysis points out that the labor market is not only weaker than before the pandemic, but also continuing to cool down, with the cooling rate possibly accelerating. If Friday's non-farm payroll report confirms that the labor market is deteriorating, it is expected that the Fed will cut rates by 50 basis points in September and another 50 basis points in November.

Unexpected Weakness in JOLTS Job Openings, Probability of 50 Basis Point Cut Soars

Data released on Wednesday showed that the number of job openings in the U.S. JOLTS in July was 7.673 million, dropping to the lowest level since the beginning of 2021, significantly below the expected 8.1 million, with the previous value revised down from 8.184 million to 7.91 million.

Sub-item data shows:

The ratio of job openings to unemployed persons has dropped to 1.1:1, lower than the pre-pandemic ratio of 1.2:1, and more similar to the employment market conditions in 2018.

The hiring rate has slightly increased from 3.3% to 3.5%, but still remains at a low level, similar to 2014. Recruitment in the leisure and hospitality industry is particularly weak, rebounding from an exceptionally low 4.5% in June to 5.5%. Government recruitment rates have sharply declined from 1.7% in March to 1.4% in July.

JOLTS job openings are labor market data that the Fed pays close attention to. After the weak data was released on Wednesday, market expectations for a 50 basis point rate cut in September increased.

According to CME's FedWatch tool, after the JOLTS report was released, the probability of a 50 basis point rate cut surged to 50%, then fell back to 45%, from 38% the day before. At the same time, the likelihood of a 25 basis point rate cut decreased from 62% the previous day to 55%.

25 or 50 Basis Points, Will Non-Farm Payrolls "Seal the Deal" on Friday?

The day before, the two major PMI data in the United States also pointed to recession and stagflation, intensifying concerns about a hard landing, and the market entered a pattern of "bad data is bad news", with U.S. stocks continuing to decline and funds once again flowing into the bond market.

The yield on the 10-year U.S. Treasury bond fell for the second consecutive day, dropping to 3.75%, the lowest level this year and since July last year.

After the JOLTS data was released, Citigroup analysts Andrew Hollenhorst and Gisela Hoxha stated in their report that the U.S. job market is on the brink of a more severe weakening:

Despite the lower layoff rate in July indicating that the labor market has not deteriorated sharply, the trend of decreasing job vacancies and declining recruitment rates, coupled with a steady rise in the unemployment rate, indicates that the employment market is on the brink of a more severe weakening. It is expected that job vacancies will continue to decrease in the coming months, with the unemployment rate rising at a faster pace.

Citi believes that if Friday's employment report confirms that the labor market is weakening, the Federal Reserve is expected to cut interest rates by 50 basis points in September and another 50 basis points in November