Payrolls—or will the Fed cut soon?

The chart above shows the month-on-month change in US non agricultural payrolls.  Note how volatile it is.  The 3 month change in the 7 month moving average is much clearer.  (The old story of the signal to noise ratio). 

Now I believe the Fed will only cut when payrolls start falling, or, at best, when the rise drops below 50,000 per month.  If you look at the month-to-month fluctuations, you can see that as often as not, a "zig" is followed by a "zag".   May's decline in the monthly increase was bigger than the markets thought it would be, which persuaded some that a cut in the Fed Funds rate was imminent.

But after the small increase in May, it is entirely possible that there will be a bigger increase in June, on the principle that zigs follow zags and vice versa.  If, however, the increase in payrolls slips again, then a Fed Funds rate cut will be very close.  And that will be because it will indicate an imminent recession—at turning points, the random fluctuations do tend to be in one direction*.  Zigs or zags one after the other, as it were.  A weak payrolls report would be consistent with the survey data from the regional Feds and with the ISM & PMI surveys, so it might provide enough confirmation to the Fed to cut rates.

If, however, the rise in payrolls in June improves, to say +150 or +200K, the Fed will postpone any rate cuts until it has more information.  After all, if GDP is still positive, and employment is still growing respectably, they could only justify rate cuts on the precautionary principle.  And a couple of times in this cycle, the economy has spontaneously picked up, making shifts in monetary policy unnecessary.

For what it's worth (and it isn't worth very much—look again at the size of the random fluctuations in payrolls in the chart above) I don't think we will get a weak payrolls number tomorrow (Friday USA, Saturday Australia)  I'm certain, though, that the trend will still be down. My guess is that we won't see falling payrolls for another three or four months.  So, to answer my question, the likelihood of near-term rate cuts by the Fed is low, even if in the medium term it approaches certainty.



*Which means they're not random, but we won't go there.