What to expect from FED Chairman’s speech at Jackson Hole?

It is expected that FED Chairman will light the blue touchpaper for an easing cycle to start at the next meeting on September 18^th. Part of the justification for this cycle will likely be the ‘normalisation’ of the tight labour market. But, before then, the Bureau of Labour Statistics (BLS) will release an update on Wednesday that is likely to hint that the jobs market has not nearly been as tight as the Fed – and everyone else – was led to believe.

On Wednesday, the BLS will give the first guide to annual revisions to payroll data next February. The revisions will cover the period from April 2023 through March 2024. Current payroll data suggests that employment rose by close to 250k per month (241k) through this period, but there is a very strong possibility that Wednesday’s first hint at revised data will show that the average gain has been much smaller than this. Now, downward revisions are not unusual.

In the revisions announced in February this year, the March 2023 level of payrolls was revised down by 187k. However, the scale of the downward revision for March 2024, when the official changes are made next February, seem likely to be many multiples of the prior change, with some estimates suggesting a figure of one million, or more.

In short, if Fed Chair Powell is looking for some evidence that the jobs market is normalising, the BLS estimate will arguably not only suggest this, but also suggest that the labour market was nowhere near as tight in the first place. Will this come as a shock to Powell and, more importantly, to the financial markets? Not really.

We have long known (and often written about) the big discrepancy that has been going on for some time between the household and establishment surveys. The former is smaller and used to calculate the unemployment rate, while the establishment survey is much bigger, covering some 119k firms and government agencies, and is therefore tracked more closely by the market than the employment figures from the household survey.

However, in this case, size might be misleading because there has always been some doubts that the bigger establishment survey might be ‘wrong’ and the household survey ‘right’. This is likely to be corroborated by the biggest survey of all, the Quarterly Census of Employment and Wages (QCEW) which was released on Wednesday. It covers some 95% of all workers and seems set to suggest that payroll growth has been far smaller than the monthly figures would have us believe.

Much of the ‘miss’ is likely due to the fact that the monthly payroll data has to take a guess at how many firms are starting up and how many have come to an end; the so-called birth/death model. It seems as if the BLS has been too generous on this score. Wednesday’s quarterly survey may provide a hint at just how generous.

Again, the direction of the revision won’t be of surprise to Powell, but the size of the likely revision to payrolls might jolt some at the Fed, and within the financial market into thinking that the state of the labour market might be worthy of more remedial monetary policy treatment than previously anticipated. It is this sort of thinking that might have made some in the market forecast that the Fed could cut rates 50-bps next month, or even deliver a very unusual inter-meeting rate cut.

However, Steve Barrow, Head of Standard Bank G10 Strategy is not in agreement with either of these views and the chances are we will retain that view even after this Wednesday’s QCEW report and Friday’s speech from Powell. His disagreement with market pricing right now is not that the starting gun for easing will be fired by anything other than a 25-bps rate cut; it is that the Fed could start to cut rates in bigger increments once it gets going. That’s in contrast to the market where a steady stream of 25-bps rate cuts is assumed until the policy rate gets down to the 3.25% region. “We don’t quibble too much about the final destination; only that the Fed may get there a little faster even if the initial cut is ‘only’ 25-bps,” said Steve Barrow.