The market is back to the "bad news is good news" logic! Soft non-farm data = higher rate cut probability, U.S. stocks and bonds are expected to receive support.

Morgan Stanley strategist Michael Wilson said that if US employment data this week shows moderate weakness, it may increase the likelihood of further interest rate cuts by the Federal Reserve and boost bullish sentiment for the US stock market. Wilson stated in a report, "We are now clearly back to the 'good news is bad news/bad news is good news' scenario." He explained that a strong labor market, while beneficial for the economy, could reduce the probability of a rate cut by the Fed in 2026. The US Labor Department is set to release the US November nonfarm payrolls data on December 16th. This data was originally scheduled for release on December 5th, but was postponed due to the government shutdown. This latest employment data, along with the US November CPI data set to be released on Thursday, will largely fill the data gap caused by the government shutdown. The market currently expects the nonfarm payrolls report to show an increase of 50,000 jobs, lower than the 119,000 jobs added in September; and the unemployment rate is expected to be 4.5%, slightly higher than September's 4.4%. Previously released ADP employment data for the US "small nonfarm" showed a deterioration in the labor market, but initial jobless claims reflected the current situation of companies "not hiring, not laying off". Economists say that the economic uncertainty brought about by tariff policies has led to a stagnation in the labor market. If the latest nonfarm payrolls data released on Tuesday aligns with market expectations, it will confirm the current state of a soft but not rapidly deteriorating labor market in the US. The Federal Reserve cut interest rates as scheduled last Wednesday, with a 9-3 vote deciding to lower the federal funds rate by 25 basis points to a range of 3.5%-3.75%. Federal Reserve Chairman Powell stated in a press conference after the rate decision that the current policy adjustment helps stabilize the weakening labor market while maintaining sufficiently tight conditions to control inflation. He said, "As the impact of tariffs gradually fades, this further policy normalization should support employment and bring inflation back down to the 2% target." The median forecast of Federal Reserve officials for the federal funds rate by the end of 2026 is 3.4%. Although the Fed's forecast for rates in 2026 implies a 25 basis points rate cut, traders are still betting that the Fed will cut rates twice next year. It is worth noting that Powell admitted in the press conference that official employment growth data may be "seriously systemically overestimated", and the actual situation may even be in negative growth. Since April, relevant models may have overestimated about 60,000 jobs each month, while during that period, job growth averaged just under 40,000 per month. Such a scale of overestimation would be equivalent to a reduction of about 20,000 jobs each month. Powell's comments suggest that job growth may have been negative in recent months, which could provide a rationale for implementing a looser monetary policy. He said, "The trend of gradual cooling in the labor market continues. Surveys of households and businesses both show that the supply and demand for labor are decreasing. So, I think it can be said that the labor market continues to gradually cool, just slightly slower than we expected." If the weakness in the labor market becomes more evident through significantly overestimated employment data, a faction within the Fed that is concerned about a soft labor market and supports rate cuts may maintain an advantage as we enter 2026. Natixis economist Christopher Hoch stated, "As the most powerful members of the Federal Reserve closely monitor the unemployment rate, we believe that conditions for further rate cuts will be in place as long as labor demand weakens and the unemployment rate rises, despite loud opposition from hawkish officials paving the way for further rate cuts." He added, "As we see the unemployment rate continuing to rise in the first quarter of 2026, we believe the Fed will continue to cut rates to prevent further weakness in the labor market." He also noted, "We think the likelihood of a rate cut in January is high." If the weakness in the labor market supports the prospect of a rate cut by the Fed, the US stock market may continue its upward trend this year. Citigroup's latest forecast shows that the S&P 500 index will rise by 12% to 7700 by the end of 2026. The core support for this forecast is robust corporate profit growth and expectations of loose monetary policy. Citigroup strategist Scott Chronert said, "A Federal Reserve that is generally supportive of rate cuts is a key assumption in our forecast." In addition to the US stock market, the US bond market is also awaiting a series of key economic data, including nonfarm payrolls, to address the core issue facing the market in 2026 - whether the Fed's easing cycle is nearing its end after three consecutive rate cuts, or if more aggressive actions are necessary. This is crucial for bond traders. If the market is correct in predicting that the Fed will cut rates twice next year, it will pave the way for a new round of stable gains in US bonds, which have been performing their best year since 2020. As of the time of writing, the yield on the policy-sensitive two-year Treasury note was 3.512%, while the yield on the ten-year Treasury note was 4.159%. Following the Fed's rate cut last week, and Powell expressing concerns about soft hiring in his speech, bond yields have slightly retreated from recent peaks. Strategist Ed Harrison said, "For US bonds to continue their upward trend, the December 16 jobs report will be the next key data point. Given the widespread expectation in the market for a 50,000 increase in nonfarm payrolls, a decrease in employment could help sustain the upward trend, and may push forward the fully priced expectation of a rate cut from June to April for the first time."