Jobs Data Wipes Out Bets on Big Fed Cuts

“The question is whether the Fed will still cut rates on this,” said Priya Misra, portfolio manager at JPMorgan Asset Management. “The funds rate at 5% is still restrictive and the economy is slowing.”

Misra expects the Fed will ease by 25 basis points next month, although the market still needs to watch price pressures. Next week’s main data release is the consumer price index for September, and inflation still remains above the Fed’s long term target of 2%.

“Now that the labor market looks good, you do have to pivot back to inflation, especially as the service sector is fine,” said Catrambone. “There is room for rates to go higher on a hotter CPI print and for rates to stabilize if the number shows inflation is moderating.”

Economists at Bank of America Corp. and JPMorgan Chase & Co. lowered their call for a half-point cut to quarter-point in November after the jobs data.

The September jobs report showed an acceleration in wage growth to a 4% annual pace — the most since May — and it comes when oil prices have surged this week amid escalating tension in the Middle East, while industrial metals are also rallying in the wake of China announcing new stimulus efforts.

Mohamed El-Erian, the president of Queens’ College, Cambridge, and Bloomberg Opinion columnist, told Boomberg Television Friday that the Fed would need to renew its focus on its fight against rising prices after September’s surprisingly hot jobs report served as a reminder that “inflation is not dead.”

The sentiment was echoed by JPMorgan Asset Management’s Misra. “If inflation risks increase, it calls into question the entire easing cycle,” she said.

Meanwhile, Federal Reserve Bank of Chicago President Austan Goolsbee warned Friday about inflation risk after noting that the central bank doesn’t want “to react too much to one month’s” of jobs data.

Figures released Friday showed US employers created 254,000 jobs in September instead of the expected call of 150,000. The unemployment rate dipped to 4.1%, while the past two months saw a net revision of 72,000 jobs.

“Overall, it’s a very strong report,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “The US rate market has been leaning and consolidating higher in yield off the back of better data this week and the jobs report adds icing on the cake.”

Faranello expects the Fed will continue “to lower rates, but the debate around that pathway will be heightened after today’s release.”

Credit: Michael Nagle/Bloomberg