UBS Group believes that Powell has not ruled out the possibility of a rate cut in January. His concerns about the labor market now outweigh his worries about upward inflationary pressures. If this week's data confirms continued weakness in the labor market (the key being whether the unemployment rate rises to 4.5%) while inflationary pressures remain manageable, the FOMC may reconsider adopting a more accommodative policy stance. The non-farm payroll reports for both October and November will be released on Tuesday, with CPI data announced on Thursday.
Powell's remarks following the December interest rate meeting were interpreted by the market as a hawkish signal. However, UBS Group’s latest report suggests that the market may have overinterpreted this stance. The forthcoming employment and CPI data will serve as critical determinants for potential rate cuts in January.
According to Wind Trading Platform, a recent report by Jonathan Pingle’s team at UBS Group highlighted that Powell’s 'cautious' tone regarding certain data mainly pertained to quality issues in household survey data affected by the government shutdown, rather than a blanket dismissal of all economic indicators. Previously, Powell explicitly stated during the press conference thatthe Federal Open Market Committeethe Federal Open Market Committee (FOMC) has not yet made any decisions regarding the January meeting, emphasizing that policy formulation will depend on upcoming data releases.
This Tuesday, nonfarm payroll reports for both October and November will be released simultaneously—an unusual arrangement that will provide the FOMC with a more comprehensive assessment of the labor market. UBS Group forecasts that, due to delays in the federal government’s Deferred Retirement Plan (DRP), nonfarm payrolls will decline by 20,000 in October but increase by 45,000 in November. More importantly,nonfarm payrollsthe unemployment rate in November may rise to 4.5%, continuing the trend of a slowing labor market.
The November CPI data will be released on Thursday. However, disruptions in data collection caused by the government shutdown may introduce significant noise into the CPI report.
Did Powell Rule Out a January Rate Cut? Was the Market Reaction Overdone?
The market’s 'hawkish' interpretation of Powell’s December press conference may have been overly cautious.
UBS Group analysis indicates that Powell’s remarks actually imply continued room for rate cuts. Powell explicitly noted that when inflation and employment risks are balanced, the federal funds rate should approach 3.0% rather than 3.5%. This suggests there is still room for a policy rate reduction even if inflation slightly exceeds the target.
"When the risks to the two objectives become more equal, you should shift from a position that is really geared toward addressing one objective to a more balanced and neutral setting," Powell stated at the press conference. Following this logic, the target rate range should span the long-term neutral level of the federal funds rate at 3.0%.
Powell also emphasized that the FOMC will "need to carefully evaluate" data affected by the government shutdown, particularly household survey data, which may contain technical distortions. However, he did not indicate that these data would be completely disregarded, but rather stressed the need for careful analysis to extract valid signals.
The report noted that the market currently assigns a relatively low implied probability to a rate cut in January. However, if this week’s data confirm continued labor market weakness alongside manageable inflation pressures, the FOMC may reconsider adopting a more accommodative policy stance. As Powell stated, he aims to "control inflation and bring it back down to 2%, while hoping to maintain a strong labor market."
Labor market weakness remains a focal point, with the key being the unemployment rate.
UBS Group believes that Powell is more concerned about the labor market than about rising inflation. During the press conference, Powell noted that labor demand has slowed more than the contraction in supply, which he does not consider to pose an inflationary risk.
"If job creation is actually negative, I believe we need to closely monitor the situation and ensure that our policies do not suppress job creation," Powell said. This statement indicates his inclination to avoid an overly tight policy stance.
Notably, during the press conference, Powell mentioned that his team estimatednonfarm payroll datathat employment figures are overestimated by approximately 60,000 per month. This suggests that actual job creation may be negative, indicating that labor market conditions are weaker than the headline data suggest.
Data support this assessment. The Employment Cost Index shows that wage growth in the leisure and hospitality sector has slowed to an annualized rate of 2.9%, the lowest since 2016, contradicting the assumption that reduced large-scale immigration should push up labor costs.
UBS Group expects that the upcoming October and November employment reports will show continued cooling in the labor market:
Nonfarm payrolls for October are projected to decline by 20,000, primarily due to the impact of deferred retirement plans among federal government employees.
Nonfarm payrolls for November are expected to increase by 45,000, still far below historical normal levels.
The unemployment rate is projected to rise to 4.5%, continuing its upward trend.
UBS Group believes the key lies in whether the unemployment rate rises as expected to 4.5%, which would provide further evidence of a continued slowdown in the labor market.
Concerns about the quality of inflation data may strengthen arguments for interest rate cuts.
The November CPI data will be significantly affected by the government shutdown, with data collection days being approximately half of the normal level. UBS Group advises investors to approach this data with caution.
More importantly, Powell expressed a relatively optimistic outlook on inflation. He noted that the current inflation overshoot is mainly driven by tariffs impacting goods prices, and this effect is expected to gradually fade, while inflation in the services sector continues to show a slowing trend.
"I believe the evidence increasingly suggests that the current situation involves declining inflation in the services sector being offset by rising inflation in goods, which is entirely concentrated in tariff-affected industries," explained Powell.
Recent inflation expectation data also supports a relatively optimistic assessment. The New York Fed’s consumer survey showed that three-year inflation expectations have remained stable at 3.0% for seven consecutive months, indicating relatively steady expectations.
UBS Group expects core CPI for November to increase by 3.15% year-over-year, slightly above market expectations of 3.06%. However, analysts caution that the November CPI data will be significantly impacted by the government shutdown, with data collection days being approximately half of the normal level, so the quality may be lower than usual. Truly reliable inflation readings will only be available with the December data.
