Written by: Li Xiaoyin, Wall Street News
As the September non-farm data far exceeded expectations and released more signals of a "soft landing" for the economy, the market's expectations for an interest rate cut this year have converged significantly.
Data released overnight showed that the U.S. non-farm payrolls increased by 254,000 in September, far exceeding expectations, and the unemployment rate fell to 4.1% for the first time in nearly a year, also lower than expected.
After the data was released, traders canceled their bets on a 50 basis point rate cut in November, and expected the Fed to cut interest rates by less than 100 basis points in the next four meetings; Bank of America and JPMorgan Chase also lowered their expectations for the Fed's November rate cut from 50 basis points to 25 basis points.
Is the interest rate cut over for the year?
Several analysts said that due to the strong non-farm data in September, the Federal Reserve may pause its interest rate cut in November.
Glen Smith, Chief Investment Officer of GDS Wealth Management, said:
"Friday's stronger-than-expected jobs report gives the Fed the flexibility to either cut rates by a quarter point at its November 7 meeting or pause in November and reconsider cutting rates in December."
Wall Street veteran Ed Yardeni said the Federal Reserve's monetary easing policy for the year may have come to an end as Friday's strong non-farm payrolls report highlighted the economy's resilience.
Former Fed Governor Randy Kroszner similarly believes the Fed could choose not to cut rates if the data warrants it :
"If the data continues to beat expectations like this, the Fed may decide not to cut rates at all."
Yardeni believes that the market's aggressive pricing of rate cuts has accumulated risks, so the Fed should be more cautious in this decision.
The risk is that additional easing fuels investor euphoria, which sets the stage for painful market events. Yardeni said:
"Any further rate cuts would increase stock market bubbles and increase the chances of a 1990s-style melt-up."
In the 1990s, the S&P fell by a third from its peak as a stock market bubble burst due to overvaluation of technology stocks.
In Yardeni's view, the 50 basis point rate cut in September was also "unnecessary":
“With the economy roaring and the S&P hovering near records, the Fed’s decision in September to cut rates by 50 basis points — a move typically reserved for a recession or market crash — was unnecessary.”
Beware of inflation risks behind wage growth
It is worth noting that the wage increase in this non-farm report is also an indicator worthy of attention.
The report showed that the average hourly wage in September increased by 4% year-on-year, the highest since May, exceeding the expected increase of 3.8%; the average hourly wage in September increased by 0.4% month-on-month, exceeding the expected increase of 0.3%, and remained the same as the previous value.
Kroszner noted that if wage growth doesn't fall and productivity growth isn't strong enough, the Fed may need to take more aggressive measures to control inflation.
Kroszner explained that high wage growth could lead to higher consumer prices, which in turn could push up inflation. Even if the Fed does not raise interest rates or use other monetary policy tools to control wage growth, it would need to take more stringent measures to curb inflation, which could have a negative impact on the job market.
October non-farm payrolls may be the deciding factor
Ahead of the Fed's next meeting on Nov. 7, a raft of data on employment and inflation will determine the Fed's policy trajectory.
Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, noted that the Fed may temporarily pause its rate cuts if October's nonfarm payrolls report is relatively strong while inflation proves to remain sticky.
He wrote in a note to clients:
“The latest jobs data suggests the Fed may be reconsidering its November rate cut… It’s worth briefly considering what it would take for the Fed to pause its rate hikes next month.”
