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Sept. 6, 2019, 11:18 a.m. EDT

Weaker job report in August ‘cements’ a Fed interest-rate cut in two weeks

Analysts see quarter-point move on Sept. 18

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By Greg Robb, MarketWatch


AFP/Getty Images Enlarge Image
President Donald Trump and Vice President Mike Pence examine an iconic Yellow Iron from Caterpillar Inc. An economist said the multinational is acting like a ‘deer in the headlights’ given the U.S.-China trade dispute.

The weaker-than-expected August job report makes it all-but-certain the Federal Reserve will cut its benchmark interest rate by a quarter-point at their meeting in two weeks, economists said Friday.

“A weak payrolls print all but cements a Fed rate cut in two weeks,” said Sal Guatieri, senior economist at BMO Capital Markets, said in a note to clients.

Read: U.S. creates just 130,000 new jobs in August

Brian Bethune, an economist at Tufts University, agreed: “There are enough doves to get another rate cut done.”

The doves are getting the upper-hand because the economy is slowing down more than the Fed expected, Bethune said. He sees growth running at a 1.5% annual rate in the third quarter, down from a 2.5% pace over the first half.

“The trade disputes is creating havoc for large companies like GE and Caterpillar, who are freezing like deer in the headlights,” Bethune said.

Caterpillar Inc. /zigman2/quotes/203434128/composite CAT -0.25%  shares have fallen 31% since the start of April 2018 when the trade war with China first got started. General Electric /zigman2/quotes/208495069/composite GE -0.88%  shares are down 14% over the same time period. The overall S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.39%   has risen 16% over the same period.

The Fed will meet on Sept. 17-18. The central bank already cut its benchmark rate by a quarter-point at its last meeting in July with two dissents.

Carl Tannenbaum, chief economist at Northern Trust, said he thought those Fed officials opposed to a rate cut will also argue against a September rate drop following the August job data.

“I don’t think that today’s employment news is going to change any minds,” he said.

Fed Chairman Jerome Powell will speak about the outlook later Friday.

Matt Luzzetti, chief economist at Deutsche Bank Research, said the August job report allows Powell to stick to his Jackson Hole message.

Powell told his audience at the base of the Grand Teton mountain range that the Fed has an easing bias and still is worried about spillovers from trade, Luzzetti said. The Fed chairman can afford to be noncommittal about the size of rate cuts, he added.

“The September rate cut is unlikely to be the last one,” Luzzetti said.

The market expects a quarter-point move in September and another quarter-point cut by the end of the year.

Other economists are not certain that the market will get many more rate cuts.

Former Obama administration top economist Jason Furman said that he didn’t see anything in the data that justifies more rate cuts past September.

Ian Shephedson, chief economist at Pantheon Economics, noted that wage growth is rising at a 4.2% annual rate over the past three months.

“We expect the Fed to ease this month, but the markets’ hopes of endless rate cuts will be hard to meet if inflation is rising and future inflation pressure in building,” he said.

Tannenbaum of Northern Trust agreed.

“We have not seen any crack in the U.S. household data. Spending has been good and employment steady. It might be hard for Powell to gin up enough support for the quarter-point per meeting movement that some analysts are calling for,” he said.

Stocks were slightly higher following the job data. The S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.39%   was up 1.46 points to 2,977.

/zigman2/quotes/203434128/composite
US : U.S.: NYSE
$ 130.71
-0.33 -0.25%
Volume: 4.33M
Oct. 18, 2019 6:30p
P/E Ratio
12.17
Dividend Yield
3.15%
Market Cap
$73.54 billion
Rev. per Employee
$526,173
loading...
/zigman2/quotes/208495069/composite
US : U.S.: NYSE
$ 8.96
-0.08 -0.88%
Volume: 39.02M
Oct. 18, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
0.45%
Market Cap
$78.19 billion
Rev. per Employee
$429,735
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
2,986.20
-11.75 -0.39%
Volume: 1.99B
Oct. 18, 2019 5:08p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
2,986.20
-11.75 -0.39%
Volume: 1.99B
Oct. 18, 2019 5:08p
loading...

Greg Robb is a senior reporter for MarketWatch in Washington. Follow him on Twitter @grobb2000.

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