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The unemployment rate marked its third consecutive monthly rise in June, and BNP Paribas said another increase may lead it to change its rate-cut projection for this year.
The unemployment rate rose to 4.1% in June from 4.0% in May, the Labor Department said Friday. In April, it rose to 3.9%.
“With the unemployment rate rising above the 4.0% level that the Fed penciled in for the year-end another increase in the jobless rate in the July report could challenge our base case of one rate cut this year in December, raising the possibility of two cuts starting in September,” BNP Paribas Senior U.S. Economist Yelena Shulyatyeva and Senior U.S. Ratings Strategist Timothy High said in a note Friday.
Fed policy makers last month indicated they may cut rates once this year. The unemployment rate rising to 4.2% in the July jobs report could potentially trigger the Sahm Rule, Shulyatyeva and High said.
The Sahm Rule, developed by Claudia Sahm, a former economist at the Federal Reserve, says that if the three-month average of the unemployment rate is 0.50 percentage point or more above its low over the prior 12 months, then the U.S. is in the early months of a recession. The Sahm Recession Indicator was 0.43 in June, according to tracking by the St. Louis Federal Reserve.
Traders in the fed funds futures market see 71% probability of the Federal Open Market Committee starting its rate-cutting cycle at its September 17-18 meeting. The odds for a December cut were ~45%. The Fed drove up its key interest rate to 5.25%-5.25% to tamp down on hot inflation.
The June jobs report also showed nonfarm payrolls rose by 206K, surpassing the 191K consensus view and slowing from May’s downwardly revised 218K pace. On Friday, the S&P 500 (SP500)(SPY)(VOO) and the Nasdaq Composite (COMP:IND)(QQQ) closed at fresh record highs as the June jobs data strengthened Fed rate-cut bets.
Details in the June report remained consistent with ongoing labor-market rebalancing, not deterioration, BNP Paribas said.
“However, signs of a more pronounced rebalancing with significant weakening in the pace of private sector job creation and away from more cyclical industries suggest restrictive policy is taking its toll on economic growth,” Shulyatyeva and High said.
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