US Goldilocks story gives the Fed scope to cut rates another 25bp

Today’s US data flow is pretty good showing that activity/jobs remain in decent shape and inflation pressures are subsiding. Initial jobless claims dropped to 216k from 228k the week before while continuing claims dropped to 1862k from 1888k, although remain in an upward trend channel. Hurricane impacts are continuing to influence the numbers, but in general the story remains that very few people are being laid off (good news), but elevated continuing claims suggest that if you are one of the unfortunate few to lose your job it is becoming more challenging to find work (not good news).

Meanwhile, the employment cost index slowed more than expected to show growth of just 0.8%QoQ. This is a really important number for the Federal Reserve as it is a measure of all in employment costs (wages+bonus+benefits). It is the weakest increase since the second quarter of 2021 and implies pipeline price pressures are weakening and boosts confidence that inflation is sustainably on the path to 2%.

Below is a chart showing how employment costs are rapidly normalising, which is what the Fed wants to see. The slowing quits rate – fewer people quitting so less incentive for employers to offer bumper pay rises – suggests we are rapidly converging on pre-pandemic norms.