Steep rate cuts are coming as the job market looks poised to weaken, Wells Fargo strategist says

• The Fed could slash rates more than expected in 2024, Wells Fargo strategist Erik Nelson said. 
• That's because the job market is likely weaker than it looks on the surface.
• Weakening job growth could be the negative catalyst that pushes the Fed to ease monetary policy.

Steep rate cuts from the Federal Reserve could be coming later this year thanks to weakening in the job market, which likely isn't as robust as some of the latest data has made it out to be, according to Wells Fargo strategist Erik Nelson.

Speaking with Bloomberg TV on Monday, Nelson estimated that the Fed could cut interest rates 100-125 basis points over the next nine months, reflecting a quicker pace of easing than what investors or central bankers have suggested this year.

Markets are pricing in a 34% chance rates could but cut by 100 basis points by the end of the year, according to the CME FedWatch tool, while Fed officials have suggested 75 basis points of rate cuts are on the table in 2024. 

Cuts will go deeper than anticipated as the economy continues to weaken, Nelson said.

"We need a catalyst, we need some data that shows these recent, strong data were just a blip. I think we'll get that," Nelson said. 

That negative catalyst could come as soon as the next few weeks, Nelson added, and it could be evident in the job market, he said, which likely isn't as strong as the numbers suggest. 

On the surface, hiring remains robust in the US. The economy added 353,000 jobs in January, much more than expected. The unemployment rate, meanwhile, is at historic lows at 3.7%. 

But much of that strength may be seasonal and no longer reflected in upcoming job reports, Nelson said. 

"I wouldn't say we're necessarily in a recessionary labor market by any means … but to think that we are adding 350,000 jobs a month, I don't really see any other data in the labor market that confirms that kind of trend," he added, estimating that job growth was actually closer around 150,000 to 200,000 payrolls a month.

"As we see some of that residual seasonality fade out of those jobs numbers, say February, March, I think the narrative will flip back to the labor market isn't as strong as we thought it was," he added.

Other market commentators have warned that hiring activity could weaken in 2024 as tighter financial conditions take a toll on businesses. Though the jobless rate is low, continuing unemployment claims are hovering around 1.9 million, according to Fed data. That qualifies as near "recessionary levels," market veteran Paul Dietrich said in a note late last year, and it is one of the handful of indicators that suggest the economy could be nearing a downturn. 

New York Fed economists see a 61% chance the economy could tip into a recession by January 2025.

Those risks, though, haven't damped enthusiasm among investors, who are still feeling optimistic about stocks. Everyday investors are feeling the most bullish on stocks in nearly 17 years, according to a sentiment indicator maintained by the Yale School of Management, and the S&P 500 continues to make news highs so far in 2024.