A 50bp cut in September 'more likely' after downward jobs revision

Citi analysts heightened the probability of a 50 basis point rate cut by the Federal Reserve in September, following a significant downward revision of U.S. job gains.

Citi explained in its note Thursday that the Bureau of Labor Statistics (BLS) revised job gains from March 2023 to March 2024 downward by approximately 818,000, or about 68,000 per month.

This adjustment, though substantial, has shifted the focus more toward the unemployment rate as a key factor in future Fed policy.

Citi's note highlights that this downward revision lowers the threshold for a 50 basis point cut in September. "The key development is not that the level of employment is close to a million jobs less than previously reported," Citi explained. "Rather, it is the fact that the run rate of monthly job growth has been boosted upward by an average of 68,000 per month."

This suggests that if the August jobs report shows, for instance, a gain of 170,000 jobs, the Fed and markets might interpret the true figure as closer to 102,000.

The impact on Treasury markets has been notable, with two-year Treasury yields falling below 4.0% following the revision.

Citi argues that this drop in yields reflects market expectations of a more dovish Fed stance. The adjustment to payrolls data means the bar for a 50 basis point cut is now lower, making such a move "more likely" if the unemployment rate continues to rise.

They state the final decision will hinge on the August jobs report, due in early September.

As Citi noted, "The focus is more squarely on the unemployment rate," with the possibility of a 50 basis point cut contingent on whether unemployment does not decline significantly.

Citi concludes that markets will remain attentive to further labor market data, including jobless claims and PMI figures, which will influence Treasury yields and Fed policy expectations.