The June jobs report was solid, easing fears that the highly disappointing May report reflected a discrete change in the direction of the labor market. That earlier disappointment had spurred us to move up our call for the first-rate cut to July, and subsequent developments led us to see even higher odds of a July cut. This report takes a bit of pressure off the Fed to cut as soon, and by as much. We think the market is correct to have substantially reduced the probability attached to a larger, 50-basis-point cut in July. However, we think that the case for easing—as set out by FOMC participants—remains essentially intact, and we continue to see a high probability of a cut at one of the next couple of meetings. We continue to expect the FOMC to cut rates 25 basis points in July, but it’s now a closer call.
The weak May jobs report was not the primary driver of the FOMC’s dovish pivot at the June FOMC meeting. Rather, FOMC participants suggested that they would be inclined to ease if elevated uncertainty about trade and the global economy persisted. That is certainly still the case, even after outcomes were recently avoided in the U.S.-China trade dispute that would have involved sharply higher tariffs in the near term. Lasting certainty on trade remains a remote prospect, and the global economic data have continued to come in weak. While the U.S. data haven’t been as bleak, they have been soft, pointing to sharply lower real GDP growth in Q2. Other factors that reinforced the inclination to ease are also still in effect: The yield curve remains inverted, inflation remains below its objective, market-based measures of inflation expectations remain worryingly low, and overheating remains a remote concern. As for the details of the June jobs report, payrolls increased 224K in June, much stronger than expected. There were slight downward revisions to previous months totaling 11K. Over the last three months, job gains have averaged a very solid 171K per month, very close to the average pace so far this year. Average hourly earnings increased 0.22% in June, and the 12-month change remained 3.1%—still nothing to make overheating a realistic concern. As for the household survey, the story remains that the unemployment rate continues to bounce around at very low levels. The unemployment rate edged up a tenth to 3.7% in June, and this was accompanied by an increase in the labor force and a one-tenth increase in the participation rate.