Source: Jin10 Data
Author: Zhu Yu

Citigroup analysts stated in a report on Tuesday that although recent labor market data may have caused some market participants to reconsider their expectations for a Fed rate cut, the Fed is unlikely to skip a rate cut during the November meeting.

Despite the significant increase of 0.254 million in non-farm payrolls last Friday, which exceeded economists' expectations of 0.14 million, analysts pointed out, "We suspect that the robust employment report released last Friday may not continue."

Citigroup pointed out, "A series of weak labor market data prior to this has led the market to expect the Fed to cut rates by at least 25 basis points at each meeting, and may take a larger 50 basis point rate cut."

Citigroup's economists stated in a report on Monday, "The threshold for not cutting rates in November is high, as one month of labor market data has not convincingly reduced the growing downside risks seen over several months, involving multiple datasets. We believe that the labor market will once again show weakness in the coming months, overall inflation trends are still slowing down, and Fed officials will cut rates by 50 basis points until December."

However, Citigroup analysts also acknowledged that last month's core Consumer Price Index (CPI) unexpectedly increased by 0.3% month-on-month, which stronger-than-expected data triggered a more hawkish narrative, making the rate cut outlook more complex.

Citigroup expresses doubts about the sustainability of recent employment growth, and points out that the increase in government employees may not continue.

They further explain that although the upcoming October employment report is expected to show weakness, market reactions may attribute this weakness to temporary factors such as hurricanes Milton and Helena, which may mask the true condition of the labor market until the release of the employment report in early December.

Citigroup predicts that even in the face of stronger inflationary pressures, Federal Reserve officials are still likely to pursue a strategy aimed at returning interest rates to a neutral level. They believe that a rate cut of at least 25 basis points will be needed in November, stating: "Although there may be stronger core CPI readings this week, we do expect inflation to remain subdued in the coming months."

Citigroup adds, "Soft global demand should suppress commodity inflation, and the loose labor market implies less risk of price increases in non-housing services."

Previously, Fed Chair Powell described the slowdown in housing inflation as "slow," but as long as the growth rates of rents and house prices slow down, Fed officials still expect housing inflation to decelerate.

Editor/Jeffy