Would the decline in employment data really prompt the Fed to cut rates?

The stock market (^DJI, ^IXIC, ^GSPC) is under pressure ahead of the highly anticipated Jobs report on Friday, as investors weigh the likelihood of an interest rate cut executed by the Federal Reserve. Joining Morning Brief to share his insights is Comerica Wealth Management Chief Investment Officer John Lynch.

Lynch believes markets are currently “overreacting,” stating, “I’m surprised to see what I would characterize as a lot of concern about Friday’s report.” He points out that the message from the Fed’s economic data is clear: core year-over-year inflation is at 2.8% and “it will be very difficult” to reach that 2% target. As a result, Lynch predicts the Fed will remain on hold until at least September.

As the market awaits the May jobs report on Friday, Lynch notes that it would take “several months of extremely weak employment data” to trigger a rate cut. However, he suggests that a “significant decline” in employment could be enough to trigger a Fed rate cut cycle.

For more expert insights and the latest market action, click here to watch this full episode of the Breakfast Roundup.

This post was written by Angel Smith

Video transcript

Now, the major indexes are moving down, seeing a lot of red on your screen along the S and P and the NASDAQ, the S and P type is continuing its downward moves about 3/10 of a percent.

As we head past the opening bell, we’ll get a pulse on the labor market at 10 a.m. with the latest job openings report and output data earlier this week showing a contraction during the month of last.

Our next guest here thinking there might be some cracks in the economy.

So for this, we are joined by John Lynn.

She is now Chief Investment Officer of Wealth Management.

Thanks so much for being here with us, John.

I mean, let’s talk about the extent of these cracks two weeks ago.

I feel like we were celebrating better than expected, the KM I meeting.

Now, here we are in this kind of Oh no, are we headed for a recession?

GDP now presents a declining situation.

Are we overreacting or were we underreacting before?

Well, good morning and I think we’re overdoing it right now, you know, we’re definitely seeing some weakness in production going on.

We have gone above, but yesterday’s report was disappointing.

I think the number of services tomorrow will be very important, because when it broke last month, it really got everyone’s attention.

But I really think it’s important for investors to focus on the fact that we saw a stable commodity order.

The story continues

We’ve seen really strong claims.

I, I’m surprised to see, uh, what I would characterize as an overconcern about Friday’s report.

You know, if businesses are spending on labor and if they’re spending on capital, which again is evident in the weekly claims data, eh which is more current and certainly durable goods orders.

You know, I think we’ll see basically unchanged if you will from last month, seeing maybe 100 and 80,000 jobs created on Friday.

So many more reports and you can pick out a piece of economic data that will really sway the Fed’s mind one way or another.

How many more reports will they need to see in order to feel like a trend is locked to their goal?

Well, I think they will have to see a while and you know, the messages are very clear for an institution that prides itself as Mr. Greenspan blur.

You know, looking at, looking at the inflation data, you know, the core year over year is still 2.8.

Now we can round up all we want, but it’s hard to get to 2% when the year-over-year core is 2.8%.

So I think they will stop.

I still think we’ll see that as soft power in the jobs data.

So, therefore, I believe the Fed is on hold until at least September.

Well, talk to me about what could be driving these rate cuts that are coming?

I mean, we’re looking at about a 5050 chance of a rate cut in September priced into the market right now.

Something like the meme trading we’re seeing right now seems like it could come to Fed members as a potential concern.

This means there is a lot of liquidity.

Is that something that you think will be at the top of their agenda in making that decision or will it be more of the data?

No, I would separate the average trade from, from the jobs data to force the Fed to cut rates will have nothing to do with the average trade.

In my opinion.

I suspect several months of extremely weak employment data, as we all know the Fed has a dual mandate, but they have only focused on inflation for the past two years.

So if you see a crack in employment, a significant drop, uh I think that would be enough.

I know some people are talking about a July looking at the Fed fund future.

Uh, I think that would be if you saw really weak May data and really weak June data that might call for a cut in July.