Weak July jobs report virtually guarantees rate cut in September — asset managers

A very soft July jobs report has increased the likelihood of interest rate cuts later this year while also raising worries about a growth slowdown, asset managers and economists said.

Lara Castleton, U.S. head of portfolio construction and strategy at Janus Henderson Investors, called the July payroll data a “bad-news-is-bad-news report for the market and will continue the growth scare that has been roiling equities lately.” The economic soft-landing narrative is now shifting to worries about a hard landing, she noted, and the market is increasing the odds that the Federal Reserve will have to make a rate cut of as much as 50 basis points in September.

Janus Henderson has $361.4 billion in assets under management.

Josh Hirt, senior international economist at Vanguard, said the softer-than-expected labor report is “consistent with the messaging we heard” on July 31 from Federal Reserve Chair Jerome Powell who said a September rate cut “could be on the table.”

Vanguard has $9.5 trillion in AUM.

The U.S. economy created only 114,000 jobs in July, well below the downwardly revised figure of 179,000 from June, and far below expectations, the U.S. Bureau of Labor Statistics reported on Aug. 2. The unemployment rate ratcheted up to 4.3% from 4.1% in the prior month.

Economists had expected an increase of 175,000 jobs in July and a jobless rate of 4.1%, according to a survey by FactSet Research Systems, a financial data firm.

The July payroll figure amounted to about one-half the average monthly gain of 215,000 jobs over the prior 12 months, the bureau said. The May payroll figure was revised down to 216,000, while the June data was revised down to 179,000. With these revisions, employment in May and June combined was 29,000 lower than previously reported.

In July, job gains were especially pronounced in the healthcare, construction, transportation and warehousing sectors, the bureau added in the release.

The Fed will clearly consider the health of the labor market when it releases its next policy decision on Sept. 18.

As of the morning of Aug. 2, according to CME Group's FedWatch tool, market participants' pricing of fed fund futures indicated there is a 64.5% probability that the central bank will cut rates by 50 basis points at the next meeting, and a 35.5% probability it will cut rates by 25 basis points.

The Fed’s key short-term interest rate is currently in a range of between 5.25% to 5.5%, after the central bank again elected to hold rates steady for the eighth straight time at its last meeting on July 31.

Josh Jamner, investment strategy analyst at ClearBridge Investments, which has AUM of $187.9 billion, called the July jobs report “disappointing but not fatal” and that 50 bps cut at the next Fed meeting might be on the table.

“But in our view that outcome remains less likely than a 25 bps initial cut given that much of the data can be characterized as welcome normalization with the economy still firmly in net positive job-creation territory,” he added.

Clark Bellin, president and chief investment officer at Bellwether Wealth, which has $500 million in assets, who also anticipates a rate cut in September, said that as the stock market starts to recalibrate what could be the start of a longer-term rate-cutting cycle, there may be additional stock market volatility along the way. “Transitions in monetary policy regimes come with stock market volatility and some uncertainty,” he warned.

But Castleton of Janus also assured that GDP is still strong, average hourly earnings are rising, and inflation is coming down.

“Equities selling off (as a reaction to the jobs data) should be seen as a normal reaction, especially considering the high valuations in many pockets of the market,” she noted. ”It’s a good reminder for investors to focus on the earnings of companies going forward.”