A 50-BP Cut Isn’t Off the Table — But Only If NFP Meets This Threshold, Says StanChart

TradingKey - While a small minority believe the Federal Reserve may need to cut rates by 50 basis points at its September policy meeting to address rising labor market risks, almost no one is placing real money on that outcome. Standard Chartered, however, has laid out specific criteria: if nonfarm payrolls come in below 40,000 and the unemployment rate rises to 4.4% or higher, a large cut would be justified.

This Friday, September 5, the U.S. will release the August nonfarm payrolls report — the final jobs report before the Fed’s mid-September policy meeting. Economists expect 75,000 new jobs, similar to July’s 73,000, with the unemployment rate rising from 4.2% to 4.3%.

Jason Tang, Senior Economist at TradingKey, expects the August labor market to show mixed signals, with employment growth roughly matching July’s pace. In July, government employment fell by 10,000, and manufacturing jobs declined for the third consecutive month, while private-sector hiring remained the main driver, adding 83,000 jobs.

In a base-case scenario, employment figures in line with or slightly below expectations would solidify market expectations for a 25-bp rate cut. Bank of America Merrill Lynch said even if the number exceeds forecasts, it won’t stop the Fed from cutting.

AlphaSimplex Group noted that if the report shows clearer signs of weakness, short-end Treasury yields could fall — a signal that the labor market is deteriorating faster than expected.

According to the CME FedWatch Tool, traders are pricing in a greater than 97% chance of a 25-basis-point cut, but 0% probability of a 50-bp cut.

Fed Rate Outlook and Cut Probabilities, Source: CME

Steve Englander, Global Head of FX Research at Standard Chartered, said that to convince markets the Fed might cut by 50 bps, the August nonfarm payrolls report would need to be significantly weaker — specifically, job gains below 40,000 and the unemployment rate at 4.4% or higher.

Like Nomura and Goldman Sachs, Englander has questioned the reliability of the Bureau of Labor Statistics’ modeling, particularly the “birth-death” model, which estimates net employment from new and closed businesses and may overstate actual job growth due to estimation errors.

Englander believes this model has overestimated U.S. job growth by about 70,000 per month over the past year. The annual benchmark revision, set for release on September 9, could reveal this statistical bias — potentially paving the way for a larger rate cut.