Wall Street is reacting to a better-than-expected labor market reading this morning. The US economy added 254,000 jobs in September, coming in significantly above the 150,000 expected by economists. Meanwhile, the unemployment rate ticked slightly lower to 4.1%, coming in below the 4.2% expected by economists.
Citi senior global economist Robert Sockin and Academy Securities head of macro strategy Peter Tchir join Morning Brief to dig into the print and what it means for the Federal Reserve's next interest rate decision.
Sockin notes that September's jobs report "feels a bit more consistent with some of the other dynamics we've seen in the economy," pointing to a moderating labor market and a resilient consumer. With this dynamic at play, he believes the Fed could move forward with a rate-easing cycle of 25 basis points, arguing, "It's hard to see a lot of urgency to go as fast as they did at the September meeting."
Tchir points out that year-over-year wage growth hit 4%, which isn't great news for the Fed. He believes that this figure "pushes the Fed out a lot" and may give Fed officials some pause as they move forward in the rate-easing cycle. Thus, he believes the Fed can initiate one more cut by the end of the year, which will likely be 25 basis points. However, further labor market readings will weigh on the decision, and at this juncture, Tchir anticipates the Fed to land at a terminal rate of 3.5%.
Joining us now to break down the numbers, we've got Robert Socken, who is the city senior global economist, and Peter Cheer, Academy Securities head of macro strategy here. Great to have you both here on set with us. So just looking into some of the data here, I mean, a massive surprise to the upside on the headline print number, and then additionally a tick lower on the unemployment rate. Robert, just want to get your quick take on this print.
Yeah, I think this is, uh, you know, looking at the headline figures, very good news, and I think more broadly, feels a bit more consistent with some of the other, uh, dynamics we've seen in the economy, which is even as the labor market has been moderating, we've continued to see a fairly strong consumer, um, that has continued to spend, uh, um, and not just on services anymore, but also maybe ticking up a bit on, on goods as well. Um, and you know, that impulse from the consumer has not seemed to slow down even as we've had these softer data from the labor market. So this data is very good news. I think for the Fed, it puts them in an interesting spot and maybe pushes them more into what they signaled at the prior meeting, which is a pace of 25 basis point moves. I think especially with the unemployment rate ticking down, which Chair Powell said was the most important metric to watch, it's hard to see a lot of urgency to go, um, as fast as they did at the September meeting.
Peter, just to get your quick thoughts here on the market's reaction. We're looking at S&P futures gain, Nasdaq 100 futures also pointing to the upside. It's also important to point out in addition to that headline beat that we got here this month, the prior month, the August non-farm payrolls, that was actually revised up to 159,000. What does this tell us then about the direction of the market? It looks like the market's seeing as good news for the economy, good news here for the market.
Yeah, I think I probably would fade the equity good news. I think we're probably going to see maybe 4% on tens because as you said, this was really nice. We actually had upward revisions for the first time in a year, I think, or maybe second time in a year. So like that, almost all the beat came in the private payrolls, it was 223,000 jobs in the private payrolls. So that's good. You want to see that sector doing well. I don't think the Fed's going to like though that year on year wages now 4%. So I think this is pushes the Fed out a lot. I don't know whether we get 50 this year even now. They maybe 25 in November, but this may give them pause, right? This is a pretty strong report and contradicts some of what they thought. So higher yields, and then I think equities fade as they that sinks in.
So it sounds like you think they can cut in November and then pause for the rest of the year?
Yeah, I think they probably still want to get at least one more cut in given this. Um, if we get more data like this though, because they will see the November payrolls. If another strong month, they may say, hey, maybe we have to keep this. And the other part to me, this is going to switch the conversation on the neutral rate a little bit. How far can they cut? I don't think they get anywhere close to 3% this time. I think it stays much more closer to three and a half percent, and the market is not digesting that yet.
And so Robert, with that in mind, I mean, that gives us the conversation around the terminal rate and where we think that the Fed may end things at. And as Peter was mentioning, I mean, this totally changes that, that type of calculus. What do you think this does for the conversation at the Fed? Even when we're going to get the meeting minutes from the last meeting going forward from here now, that's what's really going to shift, it seems like.
Yeah, absolutely. I mean, and right now the Fed feels pretty confident that they're far above wherever neutral is. Um, but they've also recognized that they don't know where that, uh, endpoint that they have to go is, and they'll kind of feel it out as they move through the data. So I think there's no doubt where we are now, rates have to go lower. Um, but yeah, as rates as they start to cut further, um, especially if the data remain as resilient as they are, um, you know, that's going to bring into question where that neutral rate is, especially if as you said, if, if inflation starts to take up. I don't think that's where we are now. I view the upside risk to inflation is much more limited than it was earlier in the year, and I still think inflation is going to move back down to target. But we've seen cautionary tails elsewhere around the world. I mean, if you look at Brazil, um, they paused their, uh, the cutting cycle, and then now we see them hiking again given the economy and inflation have been more resilient. So there are cautionary tails around the world, but there's no doubt at least where they are now, the Fed has to go lower from here.
Peter, in terms of how this changes just the narrative inside the Fed. I know you're talking about just exactly what this will look like, maybe the conversations surrounding the next two minutes, but then looking out to 2025, what does that then tell us about future moves here for the Fed and maybe what that more realistic neutral rate might be?
Yeah, so I think it's kind of brings, okay, they were so worried about jobs, that's been their fixation. I don't think they have to be in panic mode about jobs or really that worried. They'll keep a close eye on it. So I think it elevates their concerns about inflation. We'll see. China's been doing a lot of stimulus or announced a lot of stimulus. That has not really hit commodities much. So we could see maybe some, you know, inflation coming out of China. So I think it's now much more a balancing act there. And I really do think, right, they kind of thought 3% was kind of this neutral rate. Well, we've been chugging along in the economy at over 5%. Maybe the neutral rate's much higher, three and a half, 4%. So I think they're going to digest some of that. I think this really makes them much more balanced again, and we have to go beyond just watching the jobs data and look at the inflation data as well again.
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Sockin adds, "Right now, the Fed feels pretty confident that they're far above wherever neutral is. But they've also recognized that they don't know where that endpoint that they have to go is. And they'll kind of feel it out as they move through the data." He believes the upside risks to inflation are much lower now than before, and that the Fed has to continue lowering rates from here on out. However, he points to Brazil as a cautionary tale, explaining, "They paused their cutting cycle, and then now we see them hiking again given the economy and inflation have been more resilient."
While the Fed has been laser-focused on the labor market, Tchir believes that after this reading, it should be more focused on inflation: "China's been doing a lot of stimulus or announced a lot of stimulus that has not really hit commodities much. So we could see maybe some inflation coming out of China. So I think it's now much more a balancing act there," he explains.
He concludes, "I really do think they kind of thought 3% was kind of this neutral rate. Well, we've been chugging along in the economy at over 5%. Maybe the neutral rate is much higher — 3.5%, 4%. So I think they're going to digest some of that."