Following the Federal Reserve's initiation of a rate-cutting cycle, global capital markets have benefited, with multiple stock markets reaching new highs. Next week, two significant events are expected to influence the Fed's monetary policy.
On Monday, Fed Chairman Jerome Powell will discuss the U.S. economic outlook. On Friday, the U.S. government will release September's non-farm payroll data. The report is projected to show a healthy but moderated labor market, with an expected addition of 146,000 jobs, similar to August's increase. This would bring the three-month average job growth to its lowest level since mid-2019. The unemployment rate is anticipated to remain at 4.2%, with average hourly earnings growing by 3.8% year-over-year.
Bloomberg economists predict strong job growth for September, which could revive discussions about the U.S. economy experiencing a "no landing" scenario. However, they caution that the overall data may overstate the labor market's strength due to Bureau of Labor Statistics' modeling and temporary seasonal effects.
In addition to September's employment data, job vacancy figures for August will be released on Tuesday, expected to show vacancies at their lowest level since early 2021. Market participants will also monitor quit rates and layoff rates to gauge the cooling labor demand.
Amid the ongoing rate-cut cycle, inflation data has become less crucial for the Fed, while economic indicators like employment data gain importance. Friday's jobs report will be the last before the Fed's early November meeting, likely influencing rate-cut decisions. Current data indicates U.S. inflation is gradually moving towards the Fed's 2% target. The Fed's preferred inflation gauge, the August PCE year-over-year rate, fell more than expected to 2.2% this Friday.
The market remains divided on the scale of the November rate cut, with a 53.3% probability of a 50-basis-point cut and a 46.7% chance of a 25-basis-point cut. The likelihood of at least a 75-basis-point cut within the year stands at 100%, implying a significant rate cut of 50 basis points in either November or December.
St. Louis Fed President Alberto Musalem recently emphasized the need for "gradual" rate cuts, stating that it is crucial to ease restrictions progressively. He anticipates multiple rate cuts this year and will be a voting member of the Federal Open Market Committee next year. While acknowledging a cooling labor market, Musalem remains optimistic about economic prospects due to low layoff rates and underlying economic strength. He noted that large-scale layoffs do not appear imminent.
