Wall Street Review of Non-Farm Payrolls: Unexpectedly Strong, Federal Reserve Likely to Raise Rates in November! Opposing View: A Report Cannot Change the Overall Situation

On Friday, October 6th, the US non-farm payroll employment for September surged by 336,000, double the expected 170,000 and an increase of over 100,000 from the revised August figure. This not only completely dispelled expectations of a slowdown in hiring pace but also marked the largest monthly increase since January of this year.

Zerohedge, a financial blog known for its sharp tongue, stated that this data exceeded Wall Street's highest expectation of 250,000, while the consensus expectation was that September's job growth would reach its weakest level since 2023, signaling a significant decline in future employment data.

What's even more astonishing is that the data for July and August were revised upward by 79,000 and 40,000, respectively, raising the monthly employment growth to approximately 230,000. This means that the employment data for the past two months increased by nearly 120,000, demonstrating the strong job creation momentum in the US summer.

The report also showed that employment in restaurants and bars in the US has recovered to the level of February 2020, before the outbreak of the COVID-19 pandemic. The unemployment rate remained unchanged at a historic low of 3.8%, and the year-on-year wage growth of 4.2% was slightly lower than expected, marking the smallest increase since mid-2021.

The consensus view on Wall Street is that the concept of "higher for longer" interest rates has become more deeply ingrained. The resilient labor market led futures traders to significantly increase their bets on a Fed rate hike before the end of the year, reaching 56%. However, these bets dropped back to 40% during the midday trading session. The expectation of the first rate cut has been pushed back from July next year to September.

As reported by Nick Timiraos, a financial journalist known as the "New Fed News Agency," the surge in non-farm payroll employment in September is the latest sign of accelerating economic momentum, opening the door for the Fed to raise interest rates again this year:

"The report on Friday suggests that the recent strength in the labor market could complicate the Fed's recent progress in slowing the economy. The surge in hiring could reduce Fed officials' confidence in the continued decline in inflation this summer. This report is unlikely to resolve the debate within the Fed about whether to raise rates again. Officials will closely monitor the release of the US consumer inflation data for September, which will be published next Thursday, as well as how concerns about strong economic growth could lead to an increase in borrowing costs in the bond market." Moreover, mainstream financial media in the UK believes that the September non-farm payroll data has intensified investors' anxiety about "higher interest rates for a longer period of time," leading to another round of bond sell-off at the release of the data:

"People must adapt to a world where interest rates remain at higher levels for a longer period of time. The era of cheap funding is over, which will have significant economic implications. The rise in bond yields may trigger more severe volatility, and the economic growth expectations for Europe and the United States next year will slow down, showing the resilience that cannot be sustained under the current interest rate hike. However, it is foolish to hope that the cost of credit will return to the low point after the 2008 financial crisis."

The unexpected positive addition of jobs has led many mainstream analysts to bet on a rate hike by the Fed in November

Due to the resilience of the economy under the pressure of rising interest rates, labor disputes, and dysfunction in the US Congress, as shown by the September non-farm payroll data, many Wall Street analysts have begun to anticipate that the Fed will announce a 25 basis point rate hike at the meeting ending on November 1.

Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, said that the latest employment data is clearly raising expectations that the Fed has not yet completed its rate hike task, and the bond market will continue to "dominate the market." Kathy Jones, Chief Fixed Income Strategist at Charles Schwab, also said that this opens the door for the Fed to hike rates again and requires a difficult balance between restraining inflation and strong growth.

Wylie Tollett, Chief Investment Officer of Franklin Templeton Investment Solutions, Ian Lyngen, Head of US Rate Strategy at BMO Capital Markets, Andrew Hollenhorst, Chief US Economist at Citigroup, Marc Gianninoni, Chief US Economist at Barclays, and Mohamed El-Erian, Chief Economic Advisor at Allianz, all stated that "a rate hike in November is possible again."

El-Erian bluntly warned that this could shake Wall Street's confidence in the Fed's ability to achieve an "economic soft landing":

"With the US employment report pushing the Fed to maintain higher rates for a longer period of time, something may break as a result. This data is good news for the economy at present, but it is bad news for the market and the Fed. The Fed will not welcome this report. In the long run, it may also be bad news for the economy because it is consistent with my call for a recession in the US economy."

Wall Street generally believes that another rate hike is inevitable this year, and the timing of rate cuts next year will be delayed

Analysts such as Global X ETFs, Vital Knowledge, Luke Tilley, Chief Economist at Wilmington Trust, Matt Peron, Director of Research at Janus Henderson Investors, and Seema Shah, Chief Global Strategist at Principal Global Investors, although they did not comment on the specific timing of the rate hike, all acknowledge that "it is inevitable to hike rates again this year due to the difficulty of dealing with overheated economic data." "Today's data not only indicates that the Federal Reserve needs to raise interest rates further to deal with the overheating economy, but also reinforces the 'higher for longer' argument that has plagued the bond market in recent weeks. This is unfortunate for both the stock market and the bond market, as exceptionally strong data poses a challenge to the market.

Following today's data, the Federal Reserve will remain highly vigilant and very concerned about upside risks, as this will exacerbate their concerns about the economy reaccelerating. It also means that the Federal Reserve can easily raise rates by another 25 basis points and maintain them at a higher level for a longer period of time."

Ajay Rajadhyaksha, the head of rates at Barclays Bank, said that unless the CPI data to be released on Thursday, October 12th shows "exceptionally weak" inflationary pressures, the Federal Reserve will have to raise rates further.

Candice Tse, the global head of strategic consulting solutions at Goldman Sachs Asset Management, pointed out that the unexpectedly strong employment data indicates that the Federal Reserve will continue to focus on managing inflation. The employment and inflation data before the November FOMC meeting will not only provide information for the monetary decision that month, but also be an important consideration for the interest rate cut schedule in 2024.

Robert Schein, the Chief Investment Officer of Blanke Schein Wealth Management, also stated that the September non-farm payrolls solidified the Federal Reserve's reasons for further rate hikes this year and may delay the pace of the final rate cut. Previously, Federal Reserve officials, including Powell, stated that an overheated labor market would create pressure for wage and price spirals, leading to inflation well above the central bank's 2% target.

However, Bryce Doty, a senior portfolio manager at Sit Investment Associates, believes that while this report "firmly puts rate hikes back on the agenda," hourly wage data suggests that more labor supply will mean less wage inflation. "But the Federal Reserve has it backwards, thinking that more job growth will cause inflation."

The Federal Reserve may not raise rates? Singing a different tune: the surge in US bond yields reduces the need for rate hikes

However, many economists and analysts do not agree that "a hot data point is enough to change the Federal Reserve's cautious stance on future rate policies."

Daleep Singh, Chief Global Economist at PGIM Fixed Income, expressed doubts about whether the September non-farm payrolls would force the Federal Reserve to adopt a more hawkish stance. On the one hand, this is because "there is ample evidence that the labor market is rebalancing and inflation is cooling down." At the same time, the recent surge in US bond yields is increasingly becoming a reason for the Federal Reserve to not raise rates.

Those who believe that the Federal Reserve does not need to raise rates point out that the rising cost of borrowing in the United States has increased investors' confidence that the Federal Reserve has already completed its rate hikes. This week, long-term US bond yields reached a 16-year high, increasing the financing costs for businesses and consumers. "Even if the Federal Reserve does not take further action, it could still lead to an economic slowdown and lower prices." It is worth noting that Mary Daly, a voting member of the Federal Reserve and President of the San Francisco Fed, also supports the view that the surge in US bond yields makes it unnecessary for the Fed to raise interest rates. She explicitly stated on Thursday that if the significant tightening of financial conditions that has occurred in the past 90 days continues, it will reduce the need for further rate hikes by the central bank. Goldman Sachs' financial conditions index, which measures corporate borrowing costs, has risen to its highest level in a year.

Loretta Mester, a hawkish voting member of the Federal Reserve and President of the Cleveland Fed, also stated this week that the changes in US Treasury yields "will definitely affect" the decision on whether it is necessary to raise interest rates again this year, although she still believes there is room for a rate hike at the November meeting. Another hawkish board member, Bowman, stated that monetary policy has not followed a "prescribed path":

"But if the data indicate that inflation progress has stalled, or if it is unable to reach the 2% target due to a slow cooling, I will support raising rates again at future meetings."

Several Federal Reserve officials have hinted at concerns about the surge in yields, and next week's CPI and PPI inflation trends will be key.

Diane Swonk, Chief Economist at KPMG, also acknowledges that the recent surge in long-term US bond yields may have already done some of the central bank's work, but hawks at the Federal Reserve may be concerned about a setback in inflation progress at the November meeting.

Therefore, analysts who tend to believe that the Federal Reserve will not raise interest rates again are busy looking for "disappointing" aspects in the September non-farm payrolls report to prove that the labor market is still cooling and that the Fed does not need to "hastily make any rate decisions".

For example, Jason Furman, a professor at Harvard University and former Chairman of the US National Economic Council, believes that the higher-than-expected unemployment rate may indicate that more workers are entering the labor market through immigration or ending their wait-and-see approach, leading to an increase in labor supply, which helps break the long-term supply-demand imbalance and gradually reduce wage inflation. This is consistent with the views of Thomas Simons, Senior Economist at Jefferies.

Another example is Peter Tchir, Head of Macro Strategy at Academy Securities, who points out that the internal details of the latest non-farm employment report do not look as good as the headlines suggest. Average hourly wages and working hours seem to be excessively low, and the employment growth shown in the household survey is entirely maintained by part-time jobs, while full-time jobs with higher benefits have declined for three consecutive months, and the response rate to the household survey is too low, all of which make the data "abnormal":

"Nominal data makes it difficult to counter the algorithms that initially pushed up US bond yields, but it is expected that as many people in the market gradually begin to question the authenticity of this report, the initial losses in bonds and stocks will be significantly narrowed, or even turn positive for the whole day or week."

The market reaction also shows that US stocks have collectively turned positive during the midday session, with the tech-heavy Nasdaq leading the way with a strong 1.5% gain, and the S&P 500 index has indeed rebounded during the week. Otherwise, before the non-farm payroll data was released, Nasdaq futures had fallen 1%, leading the major indices, and the S&P index seemed to be heading for a fifth consecutive week of decline. At the same time, long-term bond yields have significantly reduced by two-thirds after reaching their highest level since 2007. AXS Investments CEO Greg Bassuk summarized that investors have been playing a game of ups and downs with the mixed bag of economic data in the United States this week:

"All eyes are focused on next week's Consumer Price Index (CPI) and Producer Price Index (PPI), which will show the inflation level in September and will be a key driving factor for the Federal Reserve's next interest rate decision."