September’s jobs report came in better than expected, as the US added 254,000 jobs while the unemployment rate ticked down to 4.1%.
Leslie Falconio, UBS Global Wealth Management head of taxable fixed income strategy, joins Catalysts to discuss what the print signals for the Federal Reserve’s rate-cut path ahead.
Falconio believes the print shows the market that the Fed’s 50-basis-point cut in September "is not a trend." She adds, "The market is now readjusting to a less dovish outlook, which we believe they should have to begin with. So we’re not surprised that they’re taking those cuts out." However, she notes the next jobs report could be "clouded" for the Fed as Hurricane Helene and labor strikes may weigh on the data.
If the next print were to come in as strong as September’s report, Falconio does not believe it would be enough to get the Fed to stop easing interest rates. "Inflation is trending lower. We think that inflation will continue to trend lower. There’s no question that you might have these pockets of vulnerability, such as what we’re seeing recently in oil. But the question of sustainability and the actual impact that that will have over increasing long-term inflation, we really don’t think that’s the case," she explains.
She adds, "We don’t think the Fed is going to pull back because of some large inflationary acceleration. And given the level that we’re seeing of the real fed funds rate, to continue on that cut will likely be the path. But again, it’s going to be moderate. It’s not going to be a consecutive of 50 basis points."
Falconio expects the neutral rate to fall around 3.25%, explaining that it’s difficult to pinpoint. As the market adjusts to a rough rate of 3.25%, she notes that there is a rise in inflation expectations, which has three major implications:
"One, the market is removing the expectation of a hard landing, and it’s going more to the soft landing. Two, obviously the 50-basis-point cut had the inflation vigilantes a little bit on concern. And number three, we had seen this rise in brent (BZ=F) and WTI (WTI), which again, we don’t think is necessarily going to be a lasting tailwind to rising inflation."
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