Major data is coming! The Federal Reserve is expected to continue cutting interest rates, but at a slower pace

According to the Zhitong Finance APP, the Federal Reserve will face a series of employment market data next week, which will provide important basis for its next decision. Although the reliability of government data is limited, this data is expected to further reveal the trend of a slowdown in the employment market.

Employment Market Data and Interest Rate Cut Prospects

The November employment report, to be released next Friday, is expected to correct the distorted data from October caused by hurricanes and strikes. In October, non-farm employment increased by only 12,000, with private sector employment decreasing by 28,000, mainly affected by Hurricane Helene, Hurricane Milton, and the Boeing (BA.US) strike. According to a Bloomberg survey, non-farm employment in November is expected to rebound to 190,000, above the average level of the past 12 months. This data will become an important decision-making basis for the Federal Reserve's Federal Open Market Committee (FOMC) meeting on December 17-18.

In addition, the Job Openings and Labor Turnover Survey (JOLTS) data to be released next Tuesday will also provide more clues about the employment market. This data has a smaller impact on the market but remains an important reference for observing employment market dynamics.

Unemployment Rate Slightly Rises, Layoffs Remain Low

The unemployment rate in October was 4.1%, and it may slightly rise to 4.2% in November. Although the unemployment rate has increased by 0.5 percentage points from the cyclical low, it does not reflect large-scale layoffs. Data shows that the number of new unemployment claims remains at historically low levels, with a four-week average of 217,000, close to the lowest level since the 1960s.

However, JOLTS data shows that despite fewer layoffs, hiring activity has fallen to its lowest level since 2014 (excluding the COVID-19 pandemic period). In September, job vacancies decreased by 500,000 to 7.5 million, and the ratio of job vacancies to unemployed persons fell from a peak of 2:1 in 2022 to 1.1:1. Economists at JP Morgan stated that the rise in the unemployment rate is mainly due to a decrease in job search success rates, rather than an increase in job losses.

Inflation Pressure and Tariff Policy Impact

Although the employment market remains healthy, the trend of cooling inflation is not obvious. The Personal Consumption Expenditures (PCE) index rose by 0.2% month-on-month in October, and the core PCE (excluding food and energy) rose by 0.3%, both in line with expectations. However, the core PCE rose by 2.8% year-on-year, accelerating from 2.7% in September. In addition, the "super core" service PCE (excluding housing effects), which is considered an important indicator of core inflation by Federal Reserve Chairman Jerome Powell, rose by 0.4% month-on-month in October, with the year-on-year growth rate increasing from 3.2% in September to 3.5%, indicating that inflation pressure is still intensifying.

Meanwhile, the new government's trade policy may further push up commodity prices. Trump recently stated that he would raise tariffs on imported goods from Canada and Mexico by 25% on his first day in office and impose an additional 10% tariff on Chinese goods, which may affect the inflation trend.

Market Expectations and Policy Outlook

Based on the stability of the employment market and the stubbornness of inflation, the market generally expects the Federal Reserve to lower the target range for the federal funds rate by 25 basis points from the current 4.50%-4.75% at the December meeting. According to the CME FedWatch tool, as of last Friday, the market's pricing probability for this outcome was 66.3% However, for the policy path in 2025, the market currently only expects two rate cuts of 25 basis points each, while the Federal Reserve's economic forecast from the September meeting had anticipated four rate cuts next year. This reflects that the current healthy job market, persistent inflationary pressures, and uncertainties surrounding new government policies may limit the space for rate cuts.

Overall, the resilience of the job market and inflation above target levels may lead the Federal Reserve to adopt a more cautious approach to rate cuts. Upcoming economic data will continue to dominate policy direction, and the magnitude and number of rate cuts in December still require further confirmation