The U.S. non-farm payrolls increased by 114,000 in July, the lowest record since December 2020, significantly below the expected 175,000, and a substantial decrease from the previous value of 206,000 (revised down to 179,000), with the unemployment rate rising to its highest level in nearly three years. Major Wall Street banks have raised their expectations for the number of rate cuts this year, with Goldman Sachs expecting three rate cuts this year, and there is a possibility of a 0.5% rate cut in September. Citigroup stated that there could be a 0.5% rate cut in both September and November. JPMorgan Chase even said that there is a reason to take action before the September meeting.

Analysts believe that this employment report adds to a series of disappointing U.S. macroeconomic data this week, triggering concerns about a faster downturn in the U.S. economy, leading to a decline in the stock market and a decrease in U.S. Treasury yields. These data may lead Federal Reserve officials to believe that their policies have cooled the labor market excessively rather than restoring it to a healthy level before the pandemic.

Federal Reserve Chairman Powell already stated at the FOMC press conference on Wednesday that rate cuts could start as early as September, and currently, traders are close to expecting a 0.5% rate cut at the September meeting.

Goldman Sachs: Three cuts this year, Citigroup: 3%-3.25% by mid-next year

Wall Street banks are increasing their expectations for an aggressive Federal Reserve rate cut cycle. Economists at Goldman Sachs, Citigroup, JPMorgan Chase, and Bank of America revised their predictions for U.S. monetary policy on Friday, calling for earlier, larger, or more rate cuts.

The team led by Goldman Sachs economist Jan Hatzius predicts that the Federal Reserve will cut rates by 0.25% in September, November, and December, compared to the bank's previous expectation of only two rate cuts in September and December. The Goldman Sachs team said that although the July data may overstate the weakness of the labor market, if the August report also shows weakness, a 0.5% rate cut in September "will become possible."

Citigroup's forecast is more aggressive, expecting a 0.5% rate cut in both September and November, and a 0.25% rate cut in December. Citigroup is one of the most active banks predicting that the Federal Reserve will cut rates this year, compared to their previous prediction of three rate cuts of 0.25% at each meeting.

The bank's analysts, Veronica Clark and Andrew Hollenhorst, predict that from early next year to the middle of the year, the Federal Reserve will cut rates by 0.25% at each meeting until the middle of 2025, bringing the policy rate range down to 3%-3.25%.

According to Citigroup's report, "Considering the inherent asymmetry in the Federal Reserve's potential actions, this dovish pricing is appropriate."

JPMorgan Chase economists also changed their view on the Federal Reserve's forecast to a 50 basis point rate cut at the September and November policy meetings. They also believe that the Federal Reserve has the possibility of an emergency rate cut between meetings, with a "strong reason" to take action before the scheduled policy announcement on September 18.At the same time, the team of U.S. Bank economists led by Michael Gapen, who previously expected rate cuts to start in December, has now changed its stance, stating that they anticipate the first rate cut to occur in September. The bank's analysts said:

"We now expect rate cuts in September and December. Although the employment numbers are not ideal, we believe they have been affected by Hurricane Barry. We have also lowered the terminal rate in the upcoming easing cycle to 3.25%-3.5%, which is 25 basis points lower than before."

There has been a significant influx of buying in the federal funds contracts following Citibank's adjustment of its Federal Reserve forecast to a 50 basis point rate cut at the September meeting. At 10:12 AM New York time, there was a block trade of 18,000 October federal funds futures contracts, which were traded at a price of 95.115, corresponding to a risk weight of approximately $750k/DV01. Subsequently, at 10:23 AM, another block trade of 6,000 of the same contract was executed at a price of 95.135, with a risk weight of approximately $250k/DV01.

The trading volume for October federal funds futures on that day has approached 250,000 contracts, significantly higher than the 15-day average of 120,000 contracts. Since the contracts expire on October 31st, the positions in the contracts only include the policy meeting in September, so buying at these levels would benefit from a half percentage point move at the September policy meeting.

Following J.P. Morgan's release of expectations that there could be an inter-meeting emergency rate cut before September, there was a significant influx of buying in the August federal funds futures, including approximately 20,000 contracts traded between 11:21 and 11:25 New York time. The contract will expire on August 30th, before the Federal Reserve announcement on September 18th, so new risk buying at these levels would benefit from additional pricing for emergency inter-meeting policy action.

The largest flow of the day occurred at 10:45 and 10:53, with a total of 3,000 trades at levels of 94.695 and 94.690, respectively. The highest price for the contract was 94.71, which implies a rate of 5.29%, equivalent to a rate cut premium of about 4 basis points, or approximately a 15% probability.

Interest rate swaps indicate that traders believe there is a greater than 70% chance of a 0.5% rate cut in September and expect a total rate cut of about 115 basis points by the end of the year.