The unexpectedly large increase in U.S. nonfarm payrolls in September left investors wondering about the direction of Federal Reserve policy after the central bank said it had shifted its focus to the labor market after years of battling inflation.
However, after the strong wages report, market commentators said they remained concerned that inflation may not have completely disappeared and that CPI data due this week would be crucial.
The United States added a staggering 254,000 jobs last month, nearly double the market's consensus expectations, and the unemployment rate fell to 4.1%.
Economist Mohamed El-Erian said this allows the Fed to once again turn some of its attention back to fighting inflation. Inflation concerns have taken a backseat in recent months as the Fed turned its attention to seemingly deteriorating labor market conditions, but with the September jobs report beating expectations, that call may be premature.
El-Erian said in an interview, "For the Fed, this means that it must be tougher to resist pressure from the market, that is, it cannot be trapped in the dilemma of a single mission. There have been enough sayings that 'inflation is dead'. Inflation is not dead. There have been enough sayings that the Fed should only focus on full employment."
UBS suggested that the upcoming CPI report will be the next focus of market attention. UBS senior economist Brian Rose said in a report last Friday, "September CPI data will be the next key data. If prices rise more than expected, coupled with strong labor data, the possibility of the Fed staying on hold in November will increase."
The Federal Reserve may have panicked last month, but now another big rate cut may not be necessary, Bank of America analysts wrote on Friday, adjusting their forecast for the Fed's November meeting to a 25 basis point cut from a previous 50 basis point cut.
Few analysts are suggesting the Fed will keep interest rates unchanged next month, but investors have clearly adjusted their expectations.
Currently, few traders expect the Fed to cut interest rates by 50 basis points in November, and before Friday's jobs report, the market was pricing in about a 33% chance of another big rate cut. Now, CME's FedWatch tool shows a 99% chance of a 25 basis point rate cut in November, with only 1% of investors expecting rates to remain unchanged.
While banks such as Barclays have suggested that the strength of the labor market could reignite inflation concerns in the future, a sharp rise is not a universal consensus. For example, Bank of America expects the headline CPI and core CPI to rise by 0.1% and 0.3% month-on-month in September, respectively, changes that are not enough to affect the Fed's decision.
Still, with inflation still just above the Fed’s 2% target, some analysts are warning investors not to ignore price pressures. Seema Shah, global chief strategist at Vanguard Asset Management, said unexpected changes in the labor market only make this more important. She said:
“The market needs to keep a close eye on inflation because there are a lot of policy risks.”
Article forwarded from: Jinshi Data