The year for the U.S. stock market is closing with an impressive note, as investors celebrate an annual increase of over 25% in the S&P 500 index. However, this flourishing trend may face its toughest challenge yet with what is being called "Super Week." This forthcoming week holds substantial significance for the financial markets, specifically due to the critical labor market data which includes the highly anticipated non-farm payroll report expected to be released on Friday.
This set of economic indicators will play a pivotal role in shaping the Federal Reserve's interest rate plans moving forward, stirring a contest among stock market investors, bond traders, and participants across various financial backgrounds. Added to this mix, numerous speeches from Federal Reserve officials, including the ever-watchful Chairman Jerome Powell, are scheduled for the same week. This heightened scrutiny on monetary policy has become crucial amid the Market’s expectation for interest rate adjustments to evolve in a less conventional manner.
Recent trends have hinted at a growing anticipation for a December interest rate cut. According to the CME Group's FedWatch Tool, as of last Friday, the probability of the Federal Reserve reducing the rates during its final meeting of the year on December 18 was estimated at 65%, a marked increase from the previous week’s roughly 50% likelihood. This rise signifies a shift in market sentiment, propelled by various economic signals that set the stage for crucial decision-making.
Nonetheless, despite these short-term expectations, there remains a prevailing apprehension among investors regarding the Federal Reserve’s ability to maintain a course of monetary easing in the future. Insights from the interest rate futures market suggest that due to an increasingly bleak outlook on inflation, traders foresee the Fed making only two more rate cuts in the upcoming year, a stark contrast to the four cuts suggested by the Fed’s dot plot back in September.
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The underlying uncertainties surrounding the Federal Reserve’s easing strategy reflect broader concerns about the current health of the American economy and labor market. Therefore, the outcomes of the economic data releases this week, coupled with the comments from Fed officials, are likely to magnify or mitigate expectations surrounding future monetary policy actions. Brent Schutte, the Chief Investment Officer at Northwestern Mutual Wealth Management, suggested that the market is on edge, hoping for favorable numbers from the upcoming non-farm payroll data while also acknowledging that overly robust outcomes could challenge the likelihood of forthcoming rate cuts.
Earlier this month, the U.S. labor market shocked analysts with an unexpected drop in October non-farm payrolls, which saw an addition of only 12,000 jobs—the lowest since 2020—far below the anticipated 100,000. Experts attributed this disappointing figure to the impact of two hurricanes and a Boeing strike; however, concerns linger that the employment landscape is indeed deteriorating. Thus, the market's focus this Friday will be on whether the November data can either revert to normality or exceed expectations.
According to a recent survey from industry media, economists are predicting that November's non-farm payrolls could show an increase of close to 195,000 jobs, a substantial recovery from the previous month’s disappointing numbers. However, an area of concern remains, as the unemployment rate might climb to 4.2%, edging up from 4.1% the previous month. Jay Bryson, who leads the economic team at Wells Fargo, indicated in a client report that, while the labor market remains strong in absolute terms, the overall trend of fatigue in employment levels has not ceased, a narrative potentially underscored by the expected rise in unemployment rate.
Angelo Kourkafas, a senior investment strategist at Edward Jones, further underlined that labor data will provide clarity on the underlying trends, a crucial criterion given that debates about the Federal Reserve's rate trajectory continue with no clear resolution at hand. This coming week is also marked by an intensive schedule of speeches from Federal Reserve officials—more than a dozen will take the stage. Among them, Jerome Powell will feature prominently when he participates in an interview at The New York Times’ DealBook Summit, scheduled for early Thursday.
In their recent proclamations, although there appears to be a spectrum of views among policymakers, a consensus is forming that the rapid pace of interest rate reductions by the Federal Reserve is unlikely to persist. During a previous statement in November, Powell remarked that the central bank does not need to rush into rate cuts, emphasizing the robustness of the labor market and the fact that inflation remains above the 2% goal. How Powell articulates perspectives on rate cuts for December and the coming year in his upcoming address is keenly anticipated by market participants.
Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, has forecasted that the Federal Reserve is likely to implement another rate cut in December, subsequently pausing on adjustments throughout 2025 to await better developments concerning inflation. Luzzetti remarked that the urgency to cut rates should be much diminished, suggesting the rationale for more cautious reductions than previously expected.
Furthermore, a report from Steve Blitz, Chief U.S. Economist at TS Lombard, posits that the Federal Reserve is grappling with the need to align current inflation data with the Taylor Rule—an economic formula that guides appropriate interest rates based on inflation levels and economic growth. Blitz noted that while he believes the Federal Reserve has a tendency to pursue rate cuts, the employment data in November will ultimately be critical for this data-dependent committee.
In a recent media roundtable, Sarah House, a senior economist at Wells Fargo, discussed projections detailing that as the calendar flips to 2025, the pace of future cuts may slow significantly, with the Federal Reserve likely decreasing rates once every other meeting. Her team is forecasting three rate reductions throughout 2025, indicating a transition to a more measured approach in responding to economic conditions.