Last Friday’s Nonfarm payroll release saw 150K jobs added into the economy in October, a downward surprise to the market which had earlier expected for larger 179K job gains during the period. This taken together with the Federal Open Market Committee (FOMC) decision to keep the Federal Funds Rate (Fed Funds) unchanged at 5.25% - 5.50% cheered the market with few quarters suggesting the US Federal Reserve (US Fed) is done with current rate-hike cycle. We have seen this kind of reaction on a couple of occasions in the previous months (recall the US mid-tier banking crisis, Post September FOMC, etc.) where rate hikes/rate cuts pendulum swung rapidly following those events. At this point, we reiterate our earlier call for the Fed to begin cutting rate by mid-2024 with baseline expectation of 75-100 bps quantum as well as our stance that a soft-landing scenario remains possible in the US.

Nonetheless, we think that market reaction since last Friday has been somewhat rapid as we hold on to the view that tapering inflation and rise in unemployment rate ahead are to continue to transpire at a gradual pace. This backdrop is unlikely to trigger a swift shift in how the Fed will guide the market in our view. Putting this into perspective, the US economy added 2,388K jobs during the January-October 2023 period, which is lower than 4,246K jobs added over the same period in 2022 but this is more of post-pandemic normalisation rather than a reflection of significant weakness in the labour market for now. Our point here is backed by the finding that annual nonfarm payroll averaged 2,196K from 2010 to 2019 (pre-pandemic), hence the current level is still relatively high by such a benchmark. Moreover, a look at recession cycles from 1965 to 2021 revealed that annual nonfarm payroll averaged 1,486K a year preceding recession.

The quantum of interest rate hike in this cycle is very steep with 525 bps delivered just within 18 months and certainly that is working its way in slowing down the economy. With the lag effects of monetary policy, more are forthcoming. Clearly, the job market needs to weaken further for any meaningful victory in the current inflation battle can be declared. We expect to see more signs of that in the next six months which eventually would translate into rate cut by middle of 2024. Along this tangent, it remains possible that we will hear a few hawkish remarks should economic data surprise the market on the upside but eventually weakness is expected to prevail as that is what monetary policy tightening is meant for. This suggests that 2024 is expected to be the year of the fixed income market given more than 300 bps increase in the 10-year US Treasury yield since the present tightening cycle started back in March 2022. However, the risk to our view is if the US Fed continues to be persistently hawkish even as we step into 2024 later by virtue of unexpected strength in the economy. The risk highlighted here is seen as small nonetheless if we were to be guided by how the economy previously behaved once the US Fed concluded its monetary policy tightening cycle.

Source: AmInvest Research - 8 Nov 2023

Macrocompendium - United States: October’s payroll number is not the reason to forget that job market weakness remains on a gradual path