Is a 50 basis point cut the new norm for the Federal Reserve? The importance of non-farm payrolls "falling off a cliff"!

On Friday, October 4th at 20:30, the United States will release the September non-farm payroll report. This is the first report after the Federal Reserve opened the door to rate cuts by 50 basis points, and it is one of the two non-farm data reports before the November meeting. With inflation falling, the performance of the job market has once again become the Fed's top concern.

Non-Farm Expectations: 140,000, 4.2%

According to a survey by Reuters, it is expected that the number of non-farm payrolls in September will increase by 140,000, far below the average monthly increase of 202,000 over the past 12 months; the unemployment rate is expected to remain unchanged at 4.2%. Facing the Fed's rate hikes, although the U.S. economy has shown surprising resilience, avoiding the widely predicted recession, the job market has gradually lost momentum. From June to August, an average of only 116,000 new jobs were added per month, the lowest three-month average since mid-2020.

Three-month moving average of new non-farm payrolls

However, there is a significant difference in forecasts for Friday's non-farm data. Analysts at Citigroup estimate that the U.S. may have created only 70,000 new jobs in September, as their survey found that respondents are finding it increasingly difficult to find work. "Survey data shows that workers are finding fewer and fewer jobs, making it increasingly difficult, confirming that the labor market is softening, as is typical in a downturn," said the bank's U.S. economist Andrew Hollenhorst. "As the Fed faces rapid softening in the labor market, we continue to expect it to adopt more aggressive easing policies."

Some forecasters believe that the unemployment rate will rise to 4.3%, returning to the level in July. However, Nancy Vanden Houten, Chief U.S. Economist at Oxford Economics, wrote that if this increase occurs, it is likely due to more people looking for work but not finding it, rather than more people being laid off.

Job Market Continues to Slow Down, But Not "Falling off a Cliff"

Before the non-farm payroll report was released, the U.S. had already published several employment market indicators this week. After two consecutive months of decline, job vacancies unexpectedly increased in August, but recruitment remained weak; the Job Openings and Labor Turnover Survey (JOLTS) report showed a decrease in layoffs, with 1.13 job openings per unemployed person in August, compared to 1.08 in July; the quit rate hit a four-year low, indicating weakening confidence in the U.S. job market.

However, the performance of the "mini non-farm" released on Wednesday exceeded expectations, slightly alleviating concerns about the U.S. labor market cooling excessively, while boosting expectations for Friday night's non-farm data. "ADP employment data continues to show strong momentum in the labor market," said Michael Contopoulos, Fixed Income Director at Richard Bernstein Advisors "The idea that employment is falling off a cliff is wrong, the market is realizing this."

Ryan Sweet, Chief US Economist at the Oxford Economics Institute, said, " **The layoff rate is still very low, but this could change rapidly, which I think is what the Fed is worried about... I might describe the labor market as 'so-so'. It is not creating enough job opportunities to keep up with the growth in the workforce." Sweet also stated that there are various reasons for the slowdown in hiring, including squeezed corporate profit margins, election uncertainty, and previous over-hiring in industries such as healthcare, leisure, and hospitality. In addition, the impact of monetary policy has a lag, and it may take some time for rate cuts to begin affecting the economy.

Is the Fed not in a hurry to cut rates? The key lies in employment

Friday's non-farm payroll report will peak this week's attention on the US labor market, with employment conditions surpassing inflation as the Fed's top concern. Barclays analysts stated, " The September employment report may be particularly important as it will be the first time in three months not affected by weather events such as hurricanes.

The Fed cut rates by 50 basis points to the 4.75%-5.00% range last month, the first rate cut since 2020, aimed at alleviating growing concerns about the health of the labor market. Fed Chairman Powell said in a speech early on October 1st that he does not want the labor market to continue cooling. Analysts expect the Fed to cut rates again in November and December, but the extent is still uncertain. Powell stated that if the economic performance meets expectations, there will be two more 25 basis point rate cuts this year. However, he also noted that labor market conditions have cooled significantly over the past year, pointing out that "workers now perceive fewer job opportunities than in 2019."

Bloomberg strategist Tatiana Darie said Powell's speech on Monday clearly poured cold water on the market's aggressive pricing for further rate cuts by the Fed for the rest of the year, as he indicated that the Fed is not in a hurry to lower rates. The CME "FedWatch" tool shows that the probability of a 25 basis point rate cut by the Fed in November is about 63%, while the probability of a 50 basis point cut is about 37%. Traders are betting that the Fed will lower rates from the current level of around 5% to a level closer to neutral within the next 12 months, estimated to be around 2.9%. This aggressive easing policy is rarely seen outside of an economic recession.

However, top economist David Rosenberg, who has been "bearish" on US employment performance, said, the rate of increase in unemployment will be faster than the rate of job vacancies decreasing, marking a key turning point in the labor market and highlighting the need for significant rate cuts starting now. Rosenberg has been pointing out the weakness in the labor market for months, previously predicting that the unemployment rate could rise to above 5% by the end of this year. He said this is because employers who hoarded labor during the pandemic will eventually start laying off workers, leading to a net loss of jobs in the US In addition, it is expected that several factors will affect the trajectory of the job market in the coming months. Although the recent rate cut by the Federal Reserve has been characterized as a "re-calibration" rather than an emergency measure, it is expected to help limit economic headwinds in the next year. Furthermore, the unusually large government budget deficit is expected to support the demand in the U.S. economy. However, it is important to note that the impact of interest rates on the economy typically has a significant lag, so the full effects of recent policy changes may not be immediately apparent