Chances of 50bps Fed Rate Cut Diminish Following Strong Jobs Report

Investing.com — Danske Bank noted on Monday that the chances of the U.S. Federal Reserve implementing a 50 basis point rate cut have decreased in light of a stronger-than-expected jobs report.

Recent U.S. employment data showed that non-farm payrolls increased by 254,000 in September, far exceeding Danske’s prediction of 160,000 and the consensus estimate of 150,000.

Additionally, average hourly earnings rose by 0.4% month-over-month, which surpassed forecasts of 0.2%. The unemployment rate also improved, dropping to 4.1% compared to the expected 4.2%, as highlighted in Danske Bank’s morning brief.

The encouraging labor market figures triggered a spike in U.S. Treasury yields, with 2-year yields jumping over 20 basis points and 10-year yields rising by more than 10 basis points. The EUR/USD exchange rate fell below the 1.10 threshold, closing at 1.098 on Friday.

Consequently, the stronger jobs report has led markets to retreat from speculating about a more aggressive 50 basis point cut by the Fed. Danske Bank remarked that market expectations are now more closely aligned with their forecasts for Fed pricing in 2024 and 2025.

The robust job data has also supported a “soft-landing” outlook for the U.S. economy, contributing to a notable increase in global equities. U.S. indices such as the S&P 500, Nasdaq, and Russell 2000 all experienced gains on Friday.

Small-cap stocks particularly thrived, benefiting from decreased recession concerns and higher yields.

In summary, Danske Bank believes the strong performance in the labor market reduces the likelihood of a 50 basis point rate cut by the Fed, with markets now anticipating more modest adjustments in the future.