Author: Li Xiaoyin

Source: Wall Street Journal

Due to the September non-farm payroll data significantly exceeding expectations, signaling a greater likelihood of an economic "soft landing," market expectations for interest rate cuts this year have sharply diminished.

Data released overnight showed that the U.S. non-farm payrolls increased by 254,000 in September, far surpassing expectations, and the unemployment rate fell to 4.1% for the first time in nearly a year, also below expectations.

Following the data release, traders canceled bets on a 50 basis point rate cut in November, with expectations for the Federal Reserve's rate cuts over the next four meetings now below 100 basis points; Bank of America and JPMorgan also revised their expectations for the Fed's November rate cut from 50 basis points down to 25 basis points.

Is the rate cut for this year over?

Multiple analysts have indicated that due to the strong September non-farm data, the Federal Reserve may pause rate cuts in November.

Glen Smith, Chief Investment Officer at GDS Wealth Management, stated:

"The employment report on Friday was stronger than expected, allowing the Fed to flexibly choose to cut rates by 25 basis points at the meeting on November 7, or to pause rate cuts in November and reconsider in December."

Wall Street veteran Ed Yardeni noted that the Federal Reserve's monetary easing policy for this year may have already ended, as the strong non-farm report on Friday highlighted the economy's resilience.

Former Fed Governor Randy Kroszner also believes that if the data proves necessary, the Fed may choose not to cut rates:

"If the data continues to exceed 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 needs to be more cautious in this decision.

The risk is that additional easing policies could fuel investor excitement, laying the groundwork for painful market events. Yardeni stated:

"Any further rate cuts would increase stock market bubbles and raise the likelihood of a 1990s-style melt-up."

In the 1990s, due to overvaluation of tech stocks, the stock market bubble burst, causing the S&P to drop by a third from its peak.

In Yardeni's view, the 50 basis point rate cut in September was also "unnecessary":

"In a booming economy with the S&P hovering near record levels, the Fed's decision to cut rates by 50 basis points in September—typically reserved for addressing economic recessions or market crashes—was unnecessary."

Beware of inflation risks behind wage growth

It is worth noting that the wage growth in this non-farm report is also a key indicator to watch.

The report showed that average hourly wages increased by 4% year-on-year in September, the highest since May, exceeding the expected 3.8%; average hourly wages increased by 0.4% month-on-month, above the expected 0.3%, matching the previous value.

Kroszner pointed out that if wage growth does not decline and productivity growth is not strong enough, the Fed may need to take more aggressive measures to control inflation.

Kroszner explained that high wage growth could lead to increased consumer prices, thereby pushing up inflation. Even if the Fed does not control wage growth through interest rate hikes or other monetary policy tools, it may need to take stricter measures to curb inflation, which could negatively impact the job market.

October non-farm data may be a deciding factor

Before the Federal Reserve's next meeting on November 7, a wealth of data regarding employment and inflation will determine the Fed's policy trajectory.

Ian Lyngen, head of U.S. interest rate strategy at BMO Capital Markets, noted that if the October non-farm payroll report is relatively strong while inflation proves to remain sticky, the Fed may temporarily pause rate cuts.

In a report to clients, he wrote:

"The latest employment data suggests that the Fed may be reconsidering a rate cut in November… It is worth briefly contemplating what the Fed needs next month to pause rate hikes."

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