Wall Street comments on non-farm payrolls: unexpectedly hot, the Fed raised interest rates in November and stabilized! Oppose: A report is difficult to change

U.S. non-farm payrolls surged by 336,000 in September on Friday, October 6, double the expected 170,000 and more than 100,000 from the previous revised figure in August, completely dispelling expectations of a slowdown in hiring, but also recording the largest monthly increase since January this year.

Zerohedge, a financial blog known for its poisonous tongue, said the figure was more than Wall Street's highest forecast of 250,000, after the consensus expected that new jobs would hit the weakest level in 2023 in September and start a sharp decline in future employment data.

Even more strikingly, the July and August data were revised upwards by 79,000 and 40,000 respectively, raising the monthly employment growth to about 230,000, which is equivalent to an increase of nearly 120,000 in the previous two months, indicating the strong summer employment creativity in the United States.

The report also shows that U.S. restaurant and bar employment has returned to February 2020, pre-pandemic levels. The unemployment rate was flat at a record low of 3.8 percent, and wages rose slightly less than expected by 4.2 percent year-on-year, the smallest since mid-2021.

Wall Street consensus view: "Interest rates are higher for longer."

The concept is even more deeply rooted

A tough labor market led futures traders to sharply raise their bets on a Fed rate hike to 56 percent by the end of the year, though midday bets on U.S. stocks were focused on a new fall back to 40 percent before the jobs data. Expectations for the first rate cut have been pushed back from July to September.

As Nick Timiraos, a financial journalist known as the "New Federal Reserve News Agency", co-authored, said in a report, the surge in non-farm payrolls in the United States in September is the latest sign of accelerating economic momentum, opening the door for the Fed to raise interest rates again this year:

Friday's report suggests that recent strength in the labor market could hamper the Fed's recent progress in slowing the economy. The surge in hiring could give Fed officials less confidence that inflation will continue to fall this summer.

The report is unlikely to resolve the Fed's debate over whether to raise rates again. Officials will be watching closely for next Thursday's release of U.S. CPI consumer inflation data for September and how concerns about strong economic growth have led to higher borrowing costs in the bond market. ”

There are also mainstream British financial media that the September non-farm payrolls exacerbated investors' anxiety about "interest rates remaining higher for longer", leading to another bond sell-off at the beginning of the data release:

"People have to adapt to a world where interest rates stay higher for longer, and the era of cheap money is no longer there, which will have a significant economic impact." Higher bond yields could trigger more turmoil, and economic growth in Europe and the United States is expected to slow next year (unable to sustain the resilience shown by rising interest rates). However, it would be foolish to hope that the cost of credit will fall back to its post-2008 financial crisis lows. ”

The unexpected positive job creation has led many mainstream analysts to bet on the Fed11

Monthly rate hikes

As the September non-farm payrolls showed that the economy remained resilient under the weight of rising interest rates, labor conflicts and dysfunctional US Congress, many Wall Street analysts began to look ahead to the Fed's 25 basis point rate hike at its meeting that ended on November 1.

Liz Ann Sonders, chief investment strategist at Schwab, said the latest jobs data is clearly raising expectations that the Fed has yet to finish its task of raising interest rates, and bond market performance will continue to be "market-dominant." Kathy Jones, chief fixed income strategist at Schwab, also said it opened the door for the Fed to raise interest rates again, and that a difficult balance needed between curbing inflation and strong growth.

Wylie Tollett, chief investment officer at Franklin Templeton Investment Solutions, Ian Lyngen, head of U.S. interest rate strategy at BMO Capital Markets, Andrew Hollenhorst, chief U.S. economist at Citi, Marc Gianninoni, chief U.S. economist at Barclays, and Mohamed El-Erian, chief economic adviser at Allianz, all said that "a rate hike in November is once again possible." ”。

El-Erian was even more blunt in warning that this could shake Wall Street's confidence in the Fed's ability to achieve a "soft landing":

"As the U.S. jobs report pushes the Fed to keep interest rates higher for longer, something could break down as a result." This data is good news for the economy right now, but bad news for the market and for the Fed, which will not welcome the report. In the long run, it may also be bad news for the economy, because it is consistent with what I have been calling for an eventual recession in the United States. ”

Wall Street generally believes that it is imperative to raise interest rates again this year, and the start of next year's rate cut will be delayed

Analysts such as Global X ETFs, Vital Knowledge, Luke Tilley, chief economist of Wilmington Trust, Matt Peron, research director at Janus Henderson Investors, and Seema Shah, chief global strategist at Principal Asset Management, did not comment on the specific timing of the rate hike, but all acknowledged that "overheated economic data is difficult to deal with, making it imperative to raise interest rates again this year":

"Today's data not only suggests that the Fed needs to tackle a hot economy with more rate hikes, but also reinforces the 'higher for longer' narrative that has plagued the bond market over the past few weeks, which is unfortunate for both the stock and bond markets, and the exceptionally strong data is a challenge for the market."

After today's data, the Fed will remain on high alert and very concerned about upside risks as this will exacerbate their fears of a re-acceleration of the economy and also mean that the Fed could easily raise interest rates by another 25 basis points and remain elevated for an extended period of time. ”

Ajay Rajadhyaksha, head of interest rates at Barclays, said the Fed would have to raise rates further unless the CPI released next Thursday, October 12, showed "unusually weak" inflationary pressures.

Candice Tse, global head of strategic advisory solutions at Goldman Sachs Asset Management, noted that the surprisingly strong jobs data suggests that the Fed will continue to focus on managing inflation, and that the employment and inflation data ahead of the November FOMC meeting will not only inform monetary decisions for the month, but will also be an important consideration in the 2024 rate cut schedule.

Robert Schein, chief investment officer at Blanke Schein Wealth Management, also said that September nonfarm payrolls consolidated the Fed's case for further rate hikes this year and could delay the pace of eventual rate cuts. Earlier, Fed officials, including Powell, said that the still overheated labor market would put pressure on wages and price spirals, causing inflation well above the central bank's 2 percent target.

But Bryce Doty, senior portfolio manager at Sit Investment Associates, believes that while the report puts "rate hikes firmly back on the agenda" and that hourly wage data suggests that more worker supply will mean less wage inflation, "the Fed is putting the cart before the horse and arguing that more job growth will trigger inflation." ”

Is it also possible that the Fed will not raise interest rates? Contrarian: Soaring U.S. Treasury yields reduce the need for rate hikes

However, many economists and analysts do not agree that "a hot data is enough to change the Fed's cautious attitude towards subsequent interest rate policy."

Daleep Singh, chief global economist at PGIM Fixed Income, expressed doubts about whether the September non-farm payrolls could force "a more hawkish Fed" stance, partly because of "a lot of evidence that the labor market is rebalancing and inflation is cooling", and because the recent surge in US Treasury yields is increasingly justifying "the Fed has an alternative to not raising interest rates".

The camp that believes that the Fed does not need to raise interest rates again points to the soaring cost of borrowing in the United States that has boosted investors' confidence that the Fed has completed the rate hike. This week, U.S. long-term bond yields hit their highest in sixteen years, raising funding costs for businesses and consumers, "and even if the Fed doesn't take further action, it could lead to an economic slowdown and lower prices."

It is worth noting that next year's voting committee, San Francisco Fed President Daly, also supports the view that "the surge in US Treasury yields makes it unnecessary for the Fed to raise interest rates". She made it clear on Thursday that the sharp tightening of financial conditions that has occurred over the past 90 days, if sustained, will reduce the need for the central bank to take further rate hikes. Goldman's index of financial conditions, which measures corporate borrowing costs, has risen to its highest level in a year.

Cleveland Fed President Mester, the hawkish voting committee for next year, also said this week that changes in U.S. Treasury yields "will definitely influence" the decision on whether another rate hike is necessary this year, although she still sees room for a rate hike at the November meeting. Another hawkish governor, Bowman, said monetary policy is not on a "preset path":

"But if the data suggests that inflation progress has stalled or is too slow to fall to the 2% target in time, I would support another rate hike at future meetings."

Fed officials have signaled eyeing soaring yields and CPI next week

and PPI inflation

will be key

Diane Swonk, chief economist at KPMG, also acknowledged that the recent spike in long-term Treasury yields may have done some of the central bank's work, but Fed hawks may be worried at the November meeting that progress on inflation has reversed.

Therefore, analysts who tend to believe that the Fed will not raise interest rates again are busy looking for "unsatisfactory" places in the September non-farm payrolls report, as evidence that the labor market is still cooling and that the Fed does not need to "make any hasty interest rate decisions".

For example, Jason Furman, a Harvard professor and former director of the National Economic Council, argues that a higher-than-expected unemployment rate could indicate that more workers are entering the labor market by migrating or ending the wait-and-see, leading to an increase in labor supply, helping to break the long-standing supply-demand imbalance and gradually reduce wage inflation. This echoes Thomas Simons, senior economist at Jefferies.

For example, Peter Tchir, head of macro strategy at Academy Securities, pointed out that the internal details of the latest non-farm payrolls do not look as good as the "headline party", the average hourly wage and working hours seem to be excessively low, the household survey shows that job growth is maintained by part-time jobs, full-time jobs with higher benefits are down for three consecutive months, and the proportion of responses to household surveys is too low, which makes the data "abnormal":

"The notional data makes it difficult to counter the algorithms that initially pushed up Treasury yields, but expect that as many in the market slowly begin to question the authenticity of this report, the opening losses of bonds and stocks will be significantly narrowed, or even turned higher throughout the day or this week."

And the market reaction did show that U.S. stocks have collectively turned higher at midday, especially the technology stock-dominated Nasdaq rose 1.5% to lead the way, and the S&P 500 index did rise during the week, otherwise pre-market after the release of non-farm payrolls, the Nasdaq futures index fell 1% to lead the decline of the main index, and the S&P market also seems to be heading for the fifth week of consecutive declines. At the same time, long-term bond yields have significantly cut by two-thirds after hitting their highest since 2007.

Greg Bassuk, CEO of AXS Investments, concluded that investors have been playing a game between bullish and bearish as the week begins with mixed U.S. economic data:

"All eyes are on next week's CPI and PPI, which will show inflation in September and will be a key driver of the Fed's next rate hike decision."