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Will Lower Job Growth in August Impact Fed's Rate-Cut Call?

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According to the latest jobs report from the Bureau of Labor Statistics, job growth was down in August and lagged market expectations. Per the report, the U.S. economy added 130,000 jobs, a strong reversal from the commendable July 2019 numbers. The data suggests that though the improving economy has been adding jobs, the pace has slowed due to concerns over global economic growth and trade war.

Per the Federal Reserve chairman Jerome Powell, the central bank’s stance to cut interest rates this year aided in sustaining U.S. economic growth. At a forum in Zurich, “The Fed has through the course of the year seen fit to lower the expected path of interest rates,” he said. “That has supported the economy. That is one of the reasons why the outlook is still a favorable one,” noted Powell.

Notably, jobs growth, though at a slower pace, might ease pressure on the Fed to make further interest-rate cuts at a faster pace. In addition, the current unemployment rate of 3.7% is still the lowest since December 1969.

Though trade war-related uncertainties have adversely impacted business investment and confidence, Powell described the labor market as in “quite a strong position” and the consumer to be “strong” as well. “We’re not forecasting or expecting a recession,” he mentioned. “The most likely outlook is still moderate growth, a strong labor market and inflation continuing to move back up,” noted the chairman.

Markets had been projecting 25 basis points (bps) further cut in interest rates at the end of this month. This seems to have disappointed bank stock investors, as banks are one of the biggest beneficiaries of higher interest rates. Therefore, shares of majority of these banks closed in the red last Friday.

The KBW Nasdaq Bank Index and SPDR S&P Regional Banking ETF (KRE - Free Report) declined nearly 0.3% and 0.6%, respectively, though the broader markets ended the day in green. Among the big U.S. global banks, shares of Citigroup (C - Free Report) and Bank of America (BAC - Free Report) lost 0.6% and 1.4%, respectively.

Also, several small- and mid-sized banks with huge domestic operations, including Zions Bancorporation (ZION - Free Report) , Comerica (CMA - Free Report) and Cullen/Frost Bankers, Inc. (CFR - Free Report) declined in the range of 0.4-1.5%.

Moreover, uncertainty related to the trade war still persists. Though there have been indications of resumption of trade talks between the United States and China, the outcome will likely take some time.

Among others, geopolitical tensions, low inflation level and slowing global economy are also expected to impact the decision of Fed officials, when they meet next week to decide the further course of action on interest rates.

Among the above-mentioned banks, Citigroup and BofA currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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