Strong U.S. Job Market Adjusts Rate Cut Expectations—Discussing Current Characteristics of the Rate Cut Cycle|Moomoo research

Overview of the Job Market
On October 4, 2024, the U.S. Labor Department released the non-farm payroll data for September 2024. The data showed that 254,000 new non-farm jobs were added in September, far exceeding the expected 140,000 and the revised previous value of 159,000. The unemployment rate dropped to 4.1%, below the expected 4.2% and the previous value of 4.2%. Average hourly earnings increased by 4.0% year-on-year, higher than the expected 3.8% and the revised previous value of 3.9%. These indicators suggest that the U.S. job market remains resilient, with a low likelihood of economic recession in the short term.

Leisure and Hospitality:The sector added 78,000 jobs, a significant increase from the previous value of 53,000, reflecting the robustness of the U.S. consumer market.

Professional and Business Services, Construction:These two sectors are sensitive to interest rates but added 17,000 and 25,000 jobs in September, respectively, indicating a rebound in demand.

Education and Health Services:This sector added 81,000 jobs, with 72,000 in healthcare, both exceeding previous values, indicating continued expansion in these fields.

Details of the Labor Market
The labor force participation rate in September remained unchanged from August; however, it is noteworthy that the participation rates for youth aged 16 to 19 and 20 to 24 increased by 1.5% and 0.1%, respectively. The number of unemployed individuals decreased by 281,000, and the U6 unemployment rate (which includes those working part-time for economic reasons) fell to 7.7%, down from 7.9% in August.

Adjustment of Rate Cut Expectations
In light of the strong September non-farm employment data, market expectations for significant rate cuts within the year have been adjusted downwards. Chicago Federal Reserve President Austan Goolsbee called the report "excellent" and stated that more data would be needed before the next policy meeting to decide on the pace of rate cuts. The CME FedWatch Tool indicates that the market's expectation of a 50 basis point rate cut in November has dropped from 32.1% to 0%, while the probability of a 50 basis point cut in December is now at 19.8%, up from the previous day's 11.5%.

Historical Comparison and Future Outlook
The market generally compares the current rate cuts to historical preemptive cuts; however, we believe the current rate cuts are more akin to the cycle from 1984 to 1986. During that period, the rate cuts amounted to 562.5 basis points and lasted over two years, similar to the magnitude and duration of the rate cuts currently expected by the market. The context of those cuts was similar to the current situation, with a slowing but resilient U.S. economy, cooling inflation, and the Federal Reserve choosing to cut rates in response to fiscal deficits and a strong dollar.

Outlook on Asset Prices
Based on the Federal Reserve's statements and the current state of the U.S. economy, it is expected that the U.S. economy can achieve a soft landing without triggering a financial crisis, with manageable inflation risks and a gradually cooling job market. In this context:

U.S. Treasury Yields:A clear downward trend is expected in the long term, with greater certainty for short-term rate declines.

U.S. Dollar Index:Increased uncertainty exists, but due to the insufficient resilience of the European economy, the support from the Euro-U.S. interest rate differential outweighs the pressure, limiting the downward space for the dollar index.

Gold:The trend is positive, benefiting from declining real rates and central bank gold purchasing demand, especially amid the trend of de-dollarization.

In summary, the strong performance of the U.S. job market reduces the likelihood of significant rate cuts in the short term. Combining historical experience, future rate cuts are expected to be more cautious.