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Citi on Slowing Job Growth: Dovish Asymmetries

US OUTLOOK/OPINION
  • Last Friday's less than expected but still "solid" job gain of 175k for April, coupled with "Chair Powell’s guidance earlier in the week that the Fed’s focus is shifting back toward the employment mandate (and that hikes are not being actively considered) led to a sharp dovish repricing of Fed policy expectations" Citi noted. "Interest rate markets are now implying about 45% probability of a 25bp rate cut by July with two-year Treasury yields down more than 20bp from their high on Tuesday."
  • Citi's "base case includes a first cut in July and 100bp of cumulative cuts this year. While inflation is likely to remain closer to 3% than 2% this year, we project just enough cooling in inflation to meet the Fed’s bar for a summer rate cut. The case for cuts will be much stronger if we are correct that softer April jobs are a sign of further weakening to come."
  • "We have been emphasizing two dovish asymmetries. In the data, a range of labor market indicators suggested downside labor market risk – and that was confirmed this week by below-consensus 175k new jobs and the unemployment rate ticking up from 3.8% to 3.9%."
  • "The Fed’s reaction function is also asymmetric, with Chair Powell clarifying that rate cuts may be delivered if either core inflation or labor market weakens. Viewing the data in light of the dovish reaction function, the steady march to price-out rate cuts that continued through Tuesday reversed strongly over the remainder of the week."
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