A key line from Federal Reserve chairman Jerome Powell on Wednesday was this:
"If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we are prepared to respond."
Today, the unemployment rate jumped to 4.3% from 4.1% and non-farm payrolls growth of 144K disappointed the 175K economist consensus. Is that enough to response more aggressively? The market certainly thinks so.
Here is what's priced in now.
Fed pricing now suggests a 67% chance of a 50 basis point cut in September, up from 28% before the data. Looking towards year end, pricing is now for 109 bps of easing compared to 89 before the data. Going a year out, the market now sees 202 bps in easing versus 170 bps before.
If you get away from the derivatives market, US 2-year yields are down 21 bps to 3.95%, plunging from 4.4% in the past week. If you square that up with Fed funds at approx 5.38%, it also implies a huge amount of cutting.
