Goldman Sachs Macro Trading Team: "A 50 basis point rate cut in September" should be the baseline scenario, and the market has underestimated this possibility

Goldman Sachs expects that a 50 basis point rate cut by the Federal Reserve in September should become the market consensus, rather than the widely anticipated 25 basis point cut.

According to news from the Wind Trading Desk, Goldman Sachs' macro rates trading team released a report on August 6, stating that Powell's previous hawkish remarks have been refuted by economic data, and the labor market has clearly weakened, paving the way for the Federal Reserve to adopt a more aggressive easing policy.

The team believes that after the non-farm payroll data was released last Friday, the U.S. job market has "clearly turned," and this fundamental change will prompt the Federal Reserve to consider a larger rate cut at the September meeting.

The report indicates that economic data shows a moderate restrictive level of interest rates is becoming evident, creating conditions for the Federal Reserve to adopt a more aggressive easing approach; as long as CPI does not accelerate again, the Federal Reserve has reason to implement a more aggressive easing policy.

Currently, the market is pricing in a 22 basis point rate cut for the Federal Reserve's September meeting.

Weak Signals in the Job Market Are Fully Evident

Goldman's Andrew McIlroy explicitly stated in the report that the job market has "clearly turned, rather than still in the process of turning." He pointed out that Powell mentioned the impending weakness in the labor market six times during the last press conference, and "the weakness has now arrived."

Data shows that the number of new jobs in the U.S. economy over the past three months is at its lowest level, particularly with weak performance in the private sector. Coupled with a slowdown in actual final sales growth in the first half of the year, consumers are clearly under pressure, GDP growth rate has decreased by about 100 basis points compared to the same period last year, and the unemployment rate is gradually rising.

The team also specifically focused on the divergence between the Labor Market Disparity Index (LMD) and the unemployment rate, believing that the former better reflects the actual situation.

McIlroy of the team believes that "the unemployment rate still appears to significantly underestimate the degree of weakness in the labor market," "if the labor force participation rate does not continue to decline, the actual feeling of the current unemployment rate may be closer to 4.5%," and "if the unemployment rate were really 4.5%, our discussion would be completely different."

The unemployment rate for Black Americans is currently on a vertical rise, and the report states that this phenomenon typically occurs during painful periods in the job market; the diffusion index is declining at a rare speed, with such rapid deterioration rarely seen outside of painful periods like the bursting of the internet bubble, the global financial crisis, and the pandemic.

Repricing of Rate Cut Path Expectations

Brian Bingham believes that the market's pricing of a rate cut of more than 25 basis points at the September meeting is not a high threshold. He stated that given the widespread weakness indicated by economic data represents "some degree of change," "the threshold for advancing a 50 basis point rate cut should become part of the market's baseline expectations."

The team expects that, in the face of overwhelming evidence of weakness in the job market, Powell and most members of the committee will reach a consensus on the view of "substantial weakness" in the job market.

McIlroy's basic assumption is that if inflation does not perform too well, the Federal Reserve may implement a 50 basis point easing policy; if inflation does perform well and does not rise as expected, the rate cut could reach 75-100 basis points or more. The report states that while it does not believe the economy will deteriorate comprehensively, it is "extremely clear" that policy rates should not remain at current levels.

Team member Johann Cohen also supports this view, stating that "the Federal Reserve has no choice but to actually cut rates, regardless of the inflation situation in the next two months," and believes that the September meeting will be a debate between a 25 basis point and a 50 basis point cut.

Currently, the market is pricing in a 22 basis point rate cut for the Federal Reserve's September meeting