New York Fed's service industry index hits a four-year low! Despite the absence of non-farm payrolls and CPI, rate cut expectations are still rising.

The latest economic data shows that service industry activity in the New York area has contracted at its most severe pace in over four years, reflecting a larger decline in US business activity and corporate employment. Following the unexpectedly weak release of the New York Fed's service activity composite data, expectations for rate cuts by the Federal Reserve in October and December have rapidly increased in the interest rate futures market, with almost 100% pricing in the Fed cutting rates by 25 basis points twice in a row after the 25 basis points cut in September, totaling 50 basis points, and betting there will be at least three more rate cuts in 2026 - more than the two expected before the release of the New York Fed data. As the release of US non-farm payroll and inflation data has been delayed due to the federal government shutdown, the New York Fed's service business activity statistics are crucial for investors to gain insight into the US economy and the market's expectations for Fed rate cuts. Economic output in the New York area is crucial to the US GDP, so through the service business activity in this region, one can glimpse into the US labor market and the entire US economy. The survey data reported by the New York Fed on service/manufacturing activity is extremely important for investors during the "data vacuum" in the US (e.g. massive delays in non-farm payrolls, CPI, and retail sales due to the government shutdown), with its high frequency and forward-looking attributes covering a significant and financially strong region of the US economy. Worst reading since 2021 The New York Federal Reserve Bank's composite index of service business activity for October, released on Thursday, fell by 4.2 points to -23.6, shrinking at the fastest pace in over four years. A reading below zero indicates continued contraction in business activity. This New York Fed service business activity statistics also posted its worst reading since January 2021, when the overall service sector in the US was still trying to recover from the COVID-19 pandemic. One employment indicator has contracted for two consecutive months, and views on the US business environment continue to deteriorate. The survey, along with the manufacturing statistics released earlier this week, highlights the challenges facing businesses in an environment of dramatic policy changes under the Trump administration this year. Companies are struggling to control costs associated with higher import tariffs while also adapting to the continuing uncertainty of US economic and fiscal policy, labor shortages under immigration restrictions. Despite reports of accelerating input costs reaching their highest level since early 2023, price growth for services has slowed. The report also shows that service providers' outlook on US service business activity for the next six months, while not as pessimistic as in early April, is still overall subdued. "Businesses generally do not expect the situation to improve significantly in the coming months," said Richard Deitz, an economic research consultant at the New York Fed, in a statement. The survey data collection for the New York Fed took place from October 2nd to 9th. Manufacturing statistics released by the Philadelphia Fed on Thursday showed that manufacturing activity in October in Delaware and parts of New Jersey and Pennsylvania hit a six-month low. However, the details of the report show mixed results. The new orders index rose to a three-month high, while about half of manufacturing factories reported significantly higher input prices. The output price index also accelerated. The optimism of companies surveyed by the Philadelphia Fed for the next six months hit a high not seen since April. However, fewer manufacturing factories expect to increase capital expenditure next year compared to 2024. US labor market slowdown consensus It is worth noting that, although a consensus has formed in the market that the US economy and the non-farm labor market have shifted to a lower growth phase, economic and non-farm data in the US have not yet entered a sustained negative growth phase. Whether from data sources such as ADP or Revelio employment statistics, it is evident that US corporate hiring activity has slowed. However, both these statistical agencies and major Wall Street banks like Goldman Sachs still expect the US economy to achieve a "Goldilocks-style soft landing." Recent increases in consumer spending, as expected PCE data curves, and GDP data revisions, along with recent initial jobless claims showing that the labor market has not significantly deteriorated further, have led to an increase in market expectations for the Federal Reserve to continue cutting rates three times. This raises the subjective probability of the "Goldilocks" macroeconomic scenario: that growth is not weak, inflation is not overheating, and market expectations lean more towards a lower interest rate trajectory. The so-called "Goldilocks" scenario for the US macroeconomic environment refers to an economy that is neither too hot nor too cold, maintaining moderate GDP and consumer spending growth with mild inflation, while benchmark interest rates are on a downward trajectory. These data align with the "low hiring, low layoffs" state of the US labor market seen before the government shutdown. If this situation persists until the end of the month, it is likely to be enough to push the Fed to cut rates again - this is also the widespread expectation of investors, who continue to bet that the Fed will announce consecutive rate cuts in October and December. At the same time, several officials have signaled dovishness, and high-frequency data such as the sharp decline in New York Fed service sentiment and the continued weakness of the Philadelphia Fed manufacturing index are adding to the case for a looser policy path. For the recent strong performance of US short-term government bonds, as well as the all-time highs of US stocks and global stock markets, the question of whether the expectations for the Fed's rate cut path can continue to rise or maintain a hot streak will largely determine whether the recent bullish trajectory of stocks and bonds can continue.