US Macro: Markets will be more sensitive to payrolls than the Fed – Markets will be particularly sensitive to incoming data as we approach the next FOMC on 30-31 July, when we expect a 25bp cut. The key question for markets remains whether the Fed will cut 25bp or 50bp, rather than whether they will cut at all; a 25bp cut is fully priced by OIS forwards, while a 50bp cut is 2/3 priced. Tomorrow’s June nonfarm payrolls will therefore attract even more attention than usual, particularly given the May number was a very weak +75k (the Jan-April average was +195k). Consensus expects a +160k print, and our forecast is a little higher at +170k, given the likelihood of some payback for the May weakness. A somewhat weak print (120-150k) would not have a significant market impact, but if we were to see another sub-100k reading, markets would likely take it to mean a higher likelihood of a 50bp rate cut, at least as a kneejerk reaction.
For the Fed, we doubt such a figure would be enough by itself to lead to a 50bp cut, and so we suspect such a market reaction would not last (by the same turn, we doubt a strong print would derail cuts). First, payrolls are volatile and often revised significantly. Second, although the macro data has generally been on a softening trend, it is not pointing to a recession – the kind of scenario that would normally demand such an aggressive move. The ISM surveys in particular suggest uncertainty over tariffs is weighing on investment decisions. But the read so far suggests flat to mildly negative investment growth rather than a major contraction. This is consistent with our new base case for the US, which foresees growth slowing to below trend by the end of the year. With consumption likely to remain relatively resilient, a recession still looks unlikely on our forecast horizon to end-2020. (Bill Diviney)