A December rate cut is ‘a rising prospect’ as unemployment rate hits 4%:

Macquarie analysts see a potential shift in Federal Reserve policy on the horizon. While their base case remains a 2025 rate cut, they acknowledge a December 2024 cut is a “rising prospect.”

“Softness in the US labor market data has been noticeable in recent week,” they note, pointing to recent trends in initial jobless claims and employment indicators within Purchasing Managers’ Indexes (PMIs). These signs suggest a potential slowdown in Non-Farm Payroll (NFP) growth for May.

However, Macquarie emphasized in its note earlier today that a rising unemployment rate, specifically reaching 4%, would likely be the tipping point for the Fed. In data released today, the unemployment rate rose to 4% from 3.9%.

“Our baseline remains that the Fed first cuts in 2025, but December 2024 is a rising prospect if we see today’s unemployment rate get to 4.0%,” writes the firm.

Additionally, they believe this would need to be accompanied by a sustained drop in core Personal Consumption Expenditures (PCE) inflation, closer to 0.2% than the current 0.3%.

The report acknowledges the broader market focus on global interest rate policy, particularly with central bank meetings this week from the Bank of Canada and the European Central Bank (ECB). While both institutions lowered rates, the ECB’s “neutral bias” stance and slightly revised inflation projections caused some initial market unease.

Macquarie believes these concerns are temporary, suggesting the ECB’s next move will likely be another rate cut, despite their official data-dependent approach. They point to comments from ECB President Christine Lagarde regarding the “speed” of future adjustments, hinting at a potential shift towards more frequent rate cuts.