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Macquarie: September rate cut a ‘strong possibility’

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Macquarie analysts see a growing likelihood that the Federal Reserve will cut interest rates sooner than their original December 2024 projection.

Their view is based on recent employment data that suggests a “softening” in the U.S. labor market.

While the headline non-farm payroll figure for June appeared positive, downward revisions and a less favorable composition of job gains paint a different picture, according to the firm. They note that the private sector, excluding healthcare, which saw a resurgence in job growth earlier this year, weakened again.

The unemployment rate also rose for the third consecutive month, exceeding expectations at the Fed’s June meeting. Macquarie says wage growth, however, seems to be in a “sweet spot,” with nominal wage increases moderating and real wage growth likely positive in June, supporting consumer spending.

This employment report is likely to influence the Fed’s stance on rate cuts, with the labor market becoming a more significant factor in their decision-making. While December remains their base case for the first cut, Macquarie acknowledges a September reduction as a “strong possibility.”

“While for now our base case for a first cut remains December, it has become increasingly likely that one may occur earlier than this, with a reduction at the September meeting a strong possibility,” they write.

For a September cut to materialize, Macquarie believes two conditions need to be met: continued softness in the labor market and confirmation that inflation is on a disinflationary track, moving away from the peak seen in Q1 2024.

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