Key Takeaways
- Market participants reassessed the outlook for interest rates on Friday after a surprisingly strong jobs report bolstered the case for slow-and-steady rate cuts from the Federal Reserve.
- Stocks, Treasury yields, and the U.S. dollar rose as Wall Street aligned its expectations for interest rates with the Fed’s.
- Friday’s jobs data likely took another jumbo rate cut, like the one made in September, off the table, according to many economists.
Markets were reorienting on Friday after a surprisingly strong jobs report dispelled some fears that the Federal Reserve needs to come to the rescue of a weakening labor market.
The U.S. in September added 254,000 jobs, over 100,000 more than the median forecast among economists. The unemployment rate, rather than ticking up to 4.3% as some economists had forecast, declined to 4.1%.
The data helped reassure Wall Street that the economy remains resilient despite a slowdown in hiring and a modest uptick in unemployment.
Markets Slash Rate Cut Forecasts
Market participants responded by slashing their rate-cut forecasts. The odds of the Fed cutting rates by 50 basis points, or half a percentage point, at its next meeting in November slumped from 30% yesterday to zero, according to federal funds futures trading data. The likelihood of a 50-point cut in either November or December fell from over 50% to less than 20%.
The reassessment was evident throughout financial markets on Friday. Stocks were in the green, led by the consumer discretionary sector, which directly benefits from robust employment and ample disposable income. The rate-sensitive real estate and utilities sectors each fell.
Treasury yields soared in the wake of the report, with the 10-year yield jumping about 13 basis points to 3.98%, its highest level in nearly two months. The yield on the 2-year Treasury, which is heavily influenced by the market’s expectations for the Fed’s benchmark interest rate, leaped 19 basis points to 3.93%, a one-month high.
Rising yields on Treasurys, which are traded in U.S. dollars, boosted the greenback. The U.S. Dollar Index popped 0.5% to its highest point since August. Gold fell as much as 1%.
What Economists Are Saying
The readjusted expectations aligned Wall Street’s with those of Fed officials, who in their quarterly economic projections forecast making modest rate cuts at each of their two remaining meetings this year.
“Our base case is the Fed will cut by a quarter point at the next few meetings,” wrote Jeffrey Roach, Chief Economist at LPL Financial in a commentary on Friday.
Bank of America (BofA) economist Aditya Bhave agreed. “The data flow since the Fed’s 50bp September cut has been remarkably strong,” he wrote on Friday. “Another 50bp cut isn’t warranted.” He subsequently raised BofA’s forecast for the federal funds rate at the end of 2025, which he now sees sitting in a range of 3% to 3.25%, a quarter percentage point above the firm’s prior estimate.
The October jobs report and another round of inflation data are due between now and the Fed’s mid-November meeting. A significant labor market slowdown in October could complicate the outlook and cast doubt on the size of the Fed’s next rate cut. Though officials may have reason to take October’s data with a sizable grain of salt, according to Bill Adams, Chief Economist at Comerica Bank.
“Since the October jobs report may be muddied by the impact of strikes and Hurricane Helene, the Fed could put more weight on the September jobs report at the next rate decision,” he wrote.