U.S. non-farm payrolls cooled sharply in September, and expectations for the Fed to suspend interest rate hikes in October surged

■Yiyi

In the past week, global financial markets have mainly revolved around the outlook for U.S. interest rates and long-term government bond yields. U.S. Treasury yields once rose to multi-year highs, putting global stock and bond markets under pressure. However, as Federal Reserve (Fed) officials successively released more cautious signals, and U.S. employment data in September was significantly lower than market expectations, investors' expectations for the Fed to raise interest rates again in October have rapidly cooled. Overall, the market is still in an environment where "the economy has not yet declined significantly, but inflation is still higher than the target." Therefore, interest rate expectations are still the most important variable affecting the performance of various assets.

The U.S. non-farm payrolls increased by only 29,000 in September, which cooled significantly and the unemployment rate rose slightly to 4.2%.

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The U.S. non-farm payrolls increased by only 29,000 in September, significantly lower than the revised 133,000 in the previous month, and the employment data for the previous month were also revised downwards, indicating that the momentum for new corporate hiring is slowing. The unemployment rate rose slightly to 4.2%, partly due to an increase in the labor force participation rate. Compared with the past few months, when the market was worried about economic overheating and inflation rising again, this employment report reflects that the labor market is gradually cooling down, and it also reduces the urgency for the Federal Reserve to continue to tighten monetary policy in the short term.

Recent remarks by Federal Reserve officials have also reinforced market expectations for a pause in interest rate hikes in October. New York Fed President Williams said there is no need to rush to raise interest rates again at this stage; Fed Vice Chairman Jefferson also believes that there is still reason to observe more economic data before making the next policy decision. This is significantly different from the market’s expectation that interest rates may be raised continuously in October after the Federal Reserve raised interest rates in September. At present, the market's probability of raising interest rates in October has dropped rapidly from more than 60% to about 20%.

Non-agricultural employment increased by only 29,000 in September, and the unemployment rate rose slightly to 4.2%, reflecting the weakening of corporate recruitment momentum. (Bloomberg)

Cooling employment meets sticky inflation, the Fed still has suspense about raising interest rates before the end of the year

However, the current policy problem facing the Federal Reserve is that employment momentum has begun to cool down, but inflation is still above the 2% target, and there are also upward risks in energy prices and service prices. Therefore, the market is still highly expecting that the Fed will raise interest rates again before the end of the year, indicating that investors are only delaying the timing of interest rate hikes, rather than completely ruling out further tightening.

From the perspective of financial market performance, after the release of employment data, U.S. stocks received support due to lower expectations for an interest rate hike in October, but the bond market remained relatively volatile. The U.S. 10-year Treasury bond yield recently rose to a more than two-decade high of about 5.34%, reflecting that in addition to paying attention to the Fed's policies, the market is also reassessing inflation, fiscal spending and long-term funding needs. The US dollar overall remains strong, while the European market is affected by fiscal and political uncertainty in France, which puts the euro under greater pressure. In other words, even if short-term interest rate hike expectations decline, global financial markets have not yet completely escaped the pressure caused by the high interest rate environment.

U.S. stocks gain support as U.S. bond yields soar to 20-year high

The really important focus of the subsequent market will still return to inflation. The United States will also release the Consumer Price Index (CPI) and Producer Price Index (PPI) in September. If inflation data shows that price pressures have begun to cool down, and the job market weakens, the possibility that the Federal Reserve will suspend interest rate hikes in October will further increase, and the market may also readjust the policy path for the end of the year.

Therefore, the main focus of the market recently has gradually shifted from "whether the Federal Reserve will raise interest rates immediately in October" to "whether inflation is enough for the Federal Reserve to gradually raise interest rates." The non-agricultural employment report only reduces the urgency of short-term interest rate hikes. What really determines the direction of future policy is whether inflation can continue to fall. As long as inflationary pressures have not improved significantly, the high interest rate environment is likely to continue, and the price data released in the next few weeks will become an important basis for judging the direction of the global financial market in the next stage.

(The author is an assistant manager of the Investment Research Department of Federal Investment Trust)

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