Citigroup Analysts Forecast Potential Rate Cut

Citi analysts have increased the likelihood of a 50 basis point rate cut by the Federal Reserve in September after a significant downward revision of U.S. job gains.

In a note released on Thursday, Citi indicated that the Bureau of Labor Statistics (BLS) revised job gains from March 2023 to March 2024 downward by roughly 818,000, which equates to about 68,000 per month.

This adjustment has shifted the focus towards the unemployment rate as a crucial factor influencing future Fed policy. Citi notes that this revision lowers the threshold for a 50 basis point cut in September.

Citi elaborated, “The key development is not that employment levels are nearly a million jobs less than previously reported; rather, it is that the run rate of monthly job growth has been boosted by an average of 68,000 per month.”

For instance, if the August jobs report shows a gain of 170,000 jobs, the Fed and markets might interpret the actual figure as closer to 102,000.

Following this revision, two-year Treasury yields have fallen below 4.0%, indicating a notable impact on Treasury markets.

Citi argues that this drop in yields reflects market expectations for a more dovish Fed stance. The adjusted payrolls data indicates that the bar for a 50 basis point cut is now lower, making such an action “more likely” if the unemployment rate continues to rise.

The final decision will depend heavily on the August jobs report, due in early September.

As highlighted by Citi, “The focus is more squarely on the unemployment rate,” suggesting that the likelihood of a 50 basis point cut hinges on whether unemployment does not decline significantly.

Citi concludes that markets will remain vigilant for further labor market data, including jobless claims and PMI figures, which will significantly influence Treasury yields and Fed policy expectations.