The takeaway from Powell's Jackson Hole speech was that he wanted to leave 50 basis points on the table for this meeting and future ones.
Markets are now off to a rough start in September and bonds are bid strongly, with yields down 7-8 bps across the curve despite some hefty corporate supply. With that, Fed funds futures are now pricing in a 39% chance of a 50 basis point cut on September 18.
Much of what comes at the Fed meeting will depend on Friday's non-farm payrolls report but there were hints of softness in today's manufacturing PMIs. The S&P Global survey said its measure of employment fell for first time this year.
The consensus for non-farm payrolls right now is +160K jobs and 4.2% unemployment but Citi doesn't think it will take much of a miss to tilt the Fed towards 50 bps. They see the report showing 125,000 new jobs and an unemployment rate of 4.3%, which they believe is easily enough to tilt Powell towards 50 bps.
"Relatively small differences in Friday's jobs reading could materially affect Fed policy," they write. "The pivot from inflation to jobs is complete," they write.
Even with 4.3% unemployment and an above-consensus +175K reading, they think the Fed is still likely to cut by 50 bps.
Citi adds that broader labor market trends indicate a steady weakening, with slowing hiring, declining hours worked, and rising unemployment.
"We know from past cycles that once this cycle begins it has always progressed to a US recession," says Citi. "The jobs report Friday as well as JOLTS on Wednesday will help us assess whether this progression continued."
