Three U.S. Job Gauges to Watch as Markets Project a Fed Rate Cut

(Bloomberg) -- The fourth-quarter sell-off in U.S. stocks and credit seems to have accurately presaged a weakening in economic data, along with a dovish Federal Reserve pivot. That may help explain why some market observers are discussing the potential for an interest-rate cut.

Matthew Hornbach, head of interest-rate strategy at Morgan Stanley, said in a report Monday that his bank’s economists still forecast a hike in December. Yet he argued a reduction would fit with the “framework for this Fed -- one that wants to ‘keep the party going,”’ should economic data continue to disappoint and the recent Treasury yield-curve inversion stretch beyond the central bank’s meeting in June.

“The longer the market discounts easing, the more likely it is that the market is saying policy is too tight,” Krishna Guha, head of central bank strategy at Evercore ISI, wrote in a note Tuesday delving into scenarios for a rate reduction. “If the Fed cuts rates in the coming months it is likely to cut aggressively,” he added. It might signal at least 1 percentage point of cuts “at the outset and potentially move relatively quickly.”

A rally in Treasuries has sent yields tumbling. Fed funds futures are pricing in at least a quarter-point cut from the U.S. central bank by year-end. As to whether that proves accurate, analysts point to measures in the job market to watch.

“It’s worth noting that since the Fed started publishing data for the policy rate target in 1971, they have never cut rates, let alone started an easing cycle, with jobless claims this low,” Cameron Crise, a macro strategist who writes for Bloomberg, wrote Tuesday. “The Fed is going to be a lot more sensitive to trends in the economy” than in futures trading, he wrote. “Keep an eye on claims.”

For Guha, who previously worked at the New York Fed, “the single best measure” of slowing growth momentum might be the three-month average of payroll changes against the likely sustainable hiring rate. He suggested that pace might be 80,000 to 120,000, or 120,000 to 140,000 in the case of the U.S. labor-force participation rate showing a cyclical increase. The three-month average is 186,000.

A third job-market metric to watch is the main U.S. unemployment rate and whether it stays below its 12-month moving average, according to Francis Scotland, director of global macro research at Legg Mason Inc. unit Brandywine.

“When that moves above, it’s almost a fail-safe,” Scotland told reporters in Hong Kong Tuesday. For the Fed, “if there’s room for a rate cut, which I think there is, it comes some time in the second half of the year,” he said.

Fed officials don’t necessarily agree with that view, as they project the unemployment rate to rise slightly over the next two years while also forecasting a 2020 interest-rate hike, according to median estimates released last week. No policy makers are projecting a cut.

--With assistance from Eric Lam and Benjamin Purvis.

To contact the reporter on this story: Christopher Anstey in Tokyo at canstey@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Scott Lanman, Jeff Kearns

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