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The labor market delivered an unexpected surprise on Friday, with the September jobs report showing payrolls rose by 254,000 in September, 104,000 more than expected.
Concerns over a weak labor market have been the focus of the economy over the past month, as talk has shifted from inflation, which finally appears to be under control, to the other half of the Fed’s dual mandate.
Ahead of this week, two major reports presented mixed data. JOLTS figures show that the number of job openings has increased, but the number of hires and retirements has been more conservative. ADP’s figures show that civilian salaries were surprisingly strong, but that wage growth for job-changers, a key labor market thermometer that saw continued inflation in 2021 and 2022, was weak. Ta.
As this week’s chart shows, economists have been caught off guard. The September report abruptly changed expectations for the Fed’s trajectory, with markets currently expecting four 25-basis point rate cuts over the next four meetings and a final rate hike at the end of the cut. .
Neil Dutta of Renaissance Macro Research said the report “dwarfed all other employment indicators” in showing a weakening labor market, adding that the report will be rolled out at every meeting until 2025. We believe that this will strengthen the guidance for a 25 basis point rate cut in the coming months.
“Today’s data may be the first sign of stabilization,” Dutta wrote on X (formerly Twitter).
Almost all Wall Street economists we looked at on Friday were in agreement. This shifting dynamic suggests that not only will 50 basis points be off the table at the November meeting, but some may even question further rate cuts with such a strong number.
“Given the strength of the (labor) market evident in the September jobs report, the real debate at the Fed is that monetary policy should not be changed in the first place,” Paul Ashworth, chief North American economist at Capital Economics, said in a note to clients on Friday. The question should be whether to ease it or not.” “Hopes for a (50 basis point) rate cut are long gone.”
On the other hand, life comes quickly. A new report comes out, blows everyone’s minds away, and threatens to bring back the dreaded topic of inflation just when you thought it was over.
However, in the words of Fed Chairman Jerome Powell at the June meeting, “It always makes sense to look at a series of reports rather than a single report.” The “whole” of data, not just one report. Since the data coming out of the printer is still warm, it naturally carries more weight, making the already big beat even bigger.
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What is clear is that the Fed’s wait-and-see, meet-and-greet attitude is far from being abandoned, as the uniqueness of this moment continues to emerge.
In addition to the unexpected headline numbers, the Sahm Rule, which focuses on the unemployment rate (which its founder Claudia Sahm has already downplayed), means that once passed, the economy typically continues to rise. It marked an unusual setback after previously exceeding the setback threshold. “It might be different this time” is another point of the camp.
That’s not the end. Year-on-year wage growth was between 3.9% and 4%, an increase that would normally raise serious inflation concerns, but it hasn’t. Regardless of whether “no rate cuts” is probably equivalent to raising rates, the basic narrative about the Fed’s direction hasn’t changed, only adjusted.
To offset the employment statistics, survey after survey has been published showing a decline in work incentives, which is perhaps as important a factor as the actual numbers. (If you feel like you have less work to do, you may want to be a little more conservative with your spending.)
“At first glance, the Fed should be raising rates in light of these kinds of numbers, rather than cutting them,” ING’s James Knightley wrote. “Nevertheless, given household perceptions of a deteriorating job market (even if today’s numbers do not bear that out), risks remain for growth as consumers may become more cautious in their spending.” We feel it’s skewed towards a slowdown and a decline in Fed funds.”
At least for the Fed, the wait-and-see approach of trying to land the plane gently looks even better than before. The economy looks strong and inflation is coming under control, so there’s nothing to force for now.
Ethan Wolff-Mann is a senior editor at Yahoo Finance and runs the newsletter. Follow him on X @ewolffmann.
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