Citi states that the non-farm employment report this Friday will be crucial for the recent policies of the Federal Reserve and future trends. If the employment data is strong and inflation strengthens in November, the Federal Reserve may pause interest rate hikes at the December FOMC meeting; otherwise, there is a possibility of a 50 basis point rate cut.

Citi analyst Andrew Hollenhorst stated in a report on December 2 that based on Powell's latest view, the us labor market has not stabilized and is still weakening. This means that the current policy rate is restrictive, and the labor market will not be a source of inflationary pressure. This sharply contrasts with the current market view, where investors believe the us economy is still overheating, which limits the Federal Reserve's ability to cut rates.

Given the drag from strikes and hurricanes, both the market and the Federal Reserve are currently unwilling to overinterpret the weak October employment data. In this context, Friday's employment report is not only crucial for whether the Federal Reserve will cut rates in December and January, but also essential for the path of the long-term neutral rate.

Citi currently expects the November non-farm employment report to be relatively weak, with only 0.155 million new jobs added (despite a rebound following hurricanes and strikes). This implies that potential job growth is only 0.084 million, lower than any growth rate required to prevent an increase in the unemployment rate. The unemployment rate is expected to rise to 4.3%, highlighting the trend of a loosening labor market.

Citi states that for the December FOMC meeting, the mainstream market views are currently mainly divided into two factions: one advocating a 25 basis point rate cut and the other proposing a 'pause' in rate cuts. However, the threshold for pausing rate cuts is high, requiring the addition of more than 0.3 million jobs in November and a significant exceedance of expectations for November core inflation (e.g., a month-on-month increase of 0.4% in core CPI).

Analysts believe that if the November employment data is weak, coupled with a decline in this month's core personal consumption expenditures (PCE) inflation (month-on-month below 0.2%), the Federal Reserve is expected to cut rates by 50 basis points in this month's FOMC meeting.

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