Growing Unemployment Concerns Ramp Up Expectations for Fed Rate Cut

Fed Fund futures indicate there is a 97.6% likelihood that the Fed will cut interest rates by a quarter-point at its next meeting on September 17. In addition, futures now see a better than 50% chance of an additional quarter-point cut on October 29 and a good shot at a third cut at the December meeting.

Rate-cut odds are ramping up as concerns build about sputtering job markets. It is expected that non-farm payrolls grew by only 75,000 in August and that the unemployment rate ticked up to 4.3%. That is the slowest growth since the onset of Covid in 2020.

The likelihood of a more dovish Fed has been building since Jerome Powell’s comments at Jackson Hole. The Fed Chair indicated a shift in policy that gave more weight to unemployment and focused less on tariffs. There is also a growing belief that any inflationary pressures created by tariffs will dissipate quickly as markets adjust to the shift in supply and demand.

Growing confidence that the Fed will implement a series of rate cuts by the end of the year is providing good market support. Small-cap stocks, which are more sensitive to rates because of higher levels of debt, have been exhibiting good relative strength lately, and even the consistently disappointing biotechnology group is showing signs of life.

The Magnificent Seven MAGS names boosted the market on Wednesday, and there is some follow-through on Thursday morning, but what is most important at this point is market breadth. The action under the surface was poor on Wednesday, but if weekly unemployment claims and Friday’s jobs report solidify the belief of a slow labor market, a series of Fed rate cuts becomes a certainty.

After some struggles, the bond market is now confirming the talk about a more dovish Fed. Yields dropped sharply Wednesday and are down again on Thursday morning.

I remain focused on stock picking and finding good charts. While anticipatory bears are still on the wrong side of this market, you can be sure that they are looking for a "sell the news" reaction to a Fed rate cut.

At the time of publication, Rev Shark had no positions in any securities mentioned.