In a surprising development, the U.S. added 254,000 new non-farm jobs recently, nearly doubling market expectations and dropping the unemployment rate to 4.1%. This unexpected job growth has left investors puzzled about the Federal Reserve's forthcoming policy directions. Previously, the Fed had shifted its focus to the labor market after years of battling inflation.
Economist Mohamed El-Erian commented that the robust employment data allows the Fed to refocus some attention on inflation. Over recent months, with the Fed concentrating on labor market conditions, inflation worries had taken a back seat. However, the latest job report suggests that concerns about inflation might be premature.
El-Erian emphasized that the Fed should resist market pressures to adopt a single-mission approach, noting that claims of "inflation is dead" are premature. Similarly, the notion that the Fed should only focus on full employment has been overstated.
UBS highlights the upcoming Consumer Price Index (CPI) report as the next market focus. Senior Economist Brian Rose noted that if September's CPI data exceeds expectations, combined with strong job data, the chances of the Fed maintaining its stance in November increases.
Bank of America analysts noted a potential overreaction by the Fed last month and revised their prediction for the November meeting from a 50 basis points rate cut to a 25 basis points reduction. Analysts now largely agree that the Fed is unlikely to maintain the status quo next month.
Prior to the job report, there was a 33% market expectation for a significant rate cut by the Fed. Now, CME's FedWatch tool indicates a 99% probability of a 25 basis points rate cut in November, with only 1% anticipating unchanged rates.
Despite strong labor market signals potentially reigniting inflation concerns, this upward momentum is not universally accepted. Bank of America, for instance, predicts modest increases in September's CPI and core CPI, insufficient to sway Fed decisions.
Inflation remains slightly above the Fed's 2% target, prompting some analysts to caution investors against dismissing price pressures. Seema Shah, Global Chief Strategist at Vanguard Asset Management, mentioned that unexpected labor market shifts highlight the importance of monitoring inflation due to inherent policy risks.
