Citigroup: The Fed is unlikely to skip rate cuts in November!

Citigroup analysts said in a report on Tuesday that despite recent labor market data that may have caused some market participants to reconsider their expectations for a Fed rate cut, the likelihood of the Fed skipping a rate cut during the November meeting is low.

Although the non-farm payroll increased significantly by 254,000 last Friday, higher than the economists' expected 140,000, analysts pointed out, "We doubt that the strong employment report released last Friday will continue."

Citigroup pointed out, "A series of weak labor market data prior to this has led the market to expect the Fed to cut rates by at least 25 basis points at each meeting, and may even take a larger 50 basis points rate cut."

Economists at Citigroup Group said in a report on Monday, "The threshold for not cutting rates in November is high, as a month of labor market data has not convincingly reduced the downward risks that have been growing for several months, involving multiple datasets. We believe that the labor market will soften again in the coming months, the overall inflation trend is still slowing down, and Fed officials will cut rates by 50 basis points by December."

However, Citigroup analysts also acknowledged that the core Consumer Price Index (CPI) unexpectedly increased by 0.3% month-on-month last month, which triggered a more hawkish narrative, making the rate cut prospects more complex.

Citigroup expressed doubts about the sustainability of recent employment growth and pointed out that the growth in government employment may not continue.

They further explained that although the upcoming October employment report is expected to show weakness, the market's reaction may attribute this weakness to temporary factors such as hurricanes Milton and Helena, which may mask the true state of the labor market until the early December employment report is released.

Citigroup predicts that even in the face of stronger inflation pressures, Fed officials may still pursue a strategy aimed at returning interest rates to a neutral level. They believe that a rate cut of at least 25 basis points is needed in November, and stated, "Although there may be stronger core CPI readings this week, we do believe that inflation will remain subdued in the coming months."

Citigroup added, "Weak global demand should suppress commodity inflation, and the loose labor market implies less risk of price increases in non-housing services."

Previously, Fed Chairman Powell described the slowdown in housing inflation as "slow," but as long as the growth rates of rents and house prices slow down, Fed officials still expect housing inflation to moderate