Zhongjin: September non-farm payrolls significantly exceeded expectations, can the Federal Reserve still cut interest rates in December?

China International Capital Corporation released a research report stating that as for whether the FOMC can cut interest rates in December, considering that there is less than 20 days until the next meeting and no additional data or information, it wouldn't be too surprising if the Fed did decide to pause this time. However, it is believed that a rate cut is necessary in order to address the high cost of completing the task which would require three rate cuts. Moreover, with the nomination of a new Chairman of the Federal Reserve in January next year, it would be more awkward to cut rates in the first half of the year. Following this line of thinking, even if there is no rate cut in December, it could still happen in January. Therefore, the current CME interest rate expectations essentially just shifted the expected rate cut from December to January. The main points made by China International Capital Corporation are as follows: - The delayed September nonfarm payroll data finally emerged after more than two months. - This data may not be particularly useful as there will be no more nonfarm payroll data before the December FOMC meeting (according to the BLS announcement, the October nonfarm payroll data will not be released and the November data will only be released on December 16). - The September nonfarm payroll data appeared to greatly exceed expectations on the surface, with 119,000 new jobs added, far exceeding the expected 51,000. The main contributions came from the education and health sector (59,000) and the leisure and hospitality sector (47,000); the labor force participation rate also increased from 62.3% to 62.4%. - However, upon further examination, several factors weakened the data: 1) The significant month-on-month increase in September was greatly influenced by the low base data from August; if looking at the two-month average, the average monthly job growth in August and September was only 57,500, which is considered average; 2) The job gains in July were revised downward from 79,000 to 72,000, a decrease of 7,000; in August, job gains were revised downward from 22,000 to -4,000, a decrease of 26,000; totaling a downward revision of 33,000 jobs; 3) The unemployment rate increased to 4.4%. Therefore, overall, the data at best can only indicate that there wasn't a significant net decrease of 4,000 jobs like in August, but it can hardly be considered strong, especially as it is already data from two months prior. After the data was released, sensitive assets such as US bond yields, the US dollar, and gold fluctuated up and down, but the changes were minimal, reflecting the market's hesitation and the limited incremental information provided by the data. As for whether there will be a rate cut in December, the recent decrease in rate cut expectations due to the hawkish statements from several Fed officials has become one of the culprits for the market pullback. The market may be surprised at the sudden shift in stance by the Fed towards a more hawkish position. However, this may be more due to market expectations being skewed, and if one understands the background and reasons for this rate cut, such a change should not come as a surprise. The Fed has been optimistic about the possibility of a rate cut, but has been more conservative in terms of the extent of the cut. The Fed can cut rates because short-term employment pressures are increasing and high financing costs are continuously squeezing demand; however, it does not need to cut by much because with the current actual interest rates and a 80 basis points difference from the natural interest rate, an additional three rate cuts would suffice to address the issue. From this perspective, the Fed, given the lack of guiding data and having already cut rates twice, may want to slow down the pace, wait for more data, and then make a decision, which can hardly be seen as a sudden hawkish turn. As for whether there will be a rate cut in December, given that there is less than 20 days until the next meeting and no additional data or information, it wouldn't be too surprising if the Fed did decide to pause this time. However, it is believed that a rate cut is necessary in order to address the high cost of completing the task which would require three rate cuts. Moreover, with the nomination of a new Chairman of the Federal Reserve in January next year, it would be more awkward to cut rates in the first half of the year. Following this line of thinking, even if there is no rate cut in December, it could still happen in January. Therefore, the current CME interest rate expectations essentially just shifted the expected rate cut from December to January. For the market, if there is no rate cut in December, there may still be some disturbance and impact. However, considering that any AI bubble is premature and the US stock credit cycle is gradually recovering and may even become overheated under certain conditions, indicating that profit trends are still upward, if the market pulls back due to the lack of a rate cut in December, it could still provide a good buying opportunity. As for the rate cut pace in the second half of next year, this will be seen after the new chairman takes office. However, if the rate cuts are significantly more than three times, there will be a risk of overheating and increased inflation. On the other hand, if there are less than three rate cuts, it may not be able to boost demand.