Synopsis:

Bank of America (BofA) observes sufficient softness in the July NFP print, reinforcing expectations for a September rate cut and adjusting their terminal rate forecast down to 3.25-3.5%.

Key Points:

1. September Rate Cut Locked In:

   • Employment Report: The softer-than-expected July NFP report, along with other weak data such as the ISM manufacturing report, solidifies a 25bp rate cut at the September meeting.
   • Adjustment in Outlook: BofA adjusts its monetary policy outlook in favor of more cuts, projecting a gradual easing pace.

2. Gradual Easing Expected:

   • Inflation Considerations: Despite the cooling labor market, inflation remains above the Fed's 2% target, necessitating a balanced approach to rate cuts.
   • Impact of Hurricane Beryl: The report showed significant impact from Hurricane Beryl, with 436,000 nonagricultural workers reporting they were employed but unable to work due to bad weather, up from 59k in June.
   • Trend in Employment Growth: BofA believes the three-month average of around 175k better represents the trend in hiring, rather than the 114k reported for July.

3. Reduction in Terminal Rate:

   • Revised Forecast: BofA lowers its terminal rate forecast for the upcoming normalization cycle by 25bp to a range of 3.25-3.5%.
   • Economic Cooling: The revision reflects an expectation that the economy is cooling faster than anticipated, reducing the necessity for a higher-for-longer policy stance.

Conclusion:

BofA sees the softer July NFP report as a confirmation of the need for a September rate cut and adjusts its terminal rate forecast down to 3.25-3.5%. They continue to expect a gradual pace of rate cuts, balancing the cooling labor market with persistent inflation above the Fed's target. The impact of Hurricane Beryl on employment figures and the overall trend in hiring are also considered in their updated outlook.