75 Minutes To Midnight

As you might imagine, the September jobs report was widely viewed as confirmatory for another outsized rate hike from the Fed at next month’s policy gathering.

The latest dot plot telegraphed 125bps over this year’s remaining meetings, although Jerome Powell was keen to emphasize that a “fairly large group” of officials still saw 100bps over the balance of 2022 as of last month.

I’d say it doesn’t much matter which way the Fed goes in November (i.e., 50 or 75) but it actually does. Because in light of the RBA’s downshift and the BoE’s “temporary” long-dated gilt purchases, the “pivot” narrative is in the market again. So, the signaling effect from a 50bps increment from the Fed next month would be meaningful. If this week’s Monday-Tuesday rally was any indication, an incrementally less aggressive Fed could spark a monumental bid for risk, which would ease financial conditions at cross purposes with the inflation battle. You know the story.

Exactly no Fed official has indicated anything like a willingness to pivot decisively, and most continue to insist that the data argues for ongoing assertive rate hikes. And “assertive” means 75bps. It’s through that lens that officials will assess the jobs report, which suggested the US labor remains very tight. In all likelihood, they’ll conclude that when it comes to three-quarter-point intervals, fourth time’s the charm.

Below, find a compendium of brief excerpts from analysts, virtually all of whom agree that the proverbial die is cast.

The market zeitgeist continues to hang on each incremental piece of US data, where any possible kernel of direction to be gleaned from labor market-centric economic releases in particular is having outsized impact on the daily risk-on / risk-off dynamic. Dovish (“light”) data = Bonds and equities rally, USD hammered. Hawkish (still “too strong”) data = Bonds and equities hit, USD rallies. So, the market continues to reach for “bad is good,” in hopes that the Fed tightening path will be forced to moderate. Torrential waves of hawkish Fed speakers kept on with their one-way messaging to smash “pivot” talk. That’s because FOMC members have likely been instructed that they simply cannot even open a sliver of a chance for anything which could be interpreted as “dovish” or which lends credibility to the “premature easing” scenario at this juncture. — Charlie McElligott, Nomura

In our view, the September report provided some bad news for the Fed in its battle with inflation. One aim for their rate policy to get inflation under control has been to restore the demand-supply balance in the labor market, and an unemployment rate moving down to historically-low levels goes right against this. A fourth consecutive 75bps hike in November is clearly a given and in line with our own Fed call. The strong payroll report doesn’t change the path for the Fed, ensuring that they continue to sound hawkish in their remarks. We look for strong growth and inflation to keep the Fed hiking rates, continuing to flatten the curve. — Jan Groen, Priya Misra, TD

The drop in the jobless rate to 3.5%, back on the lows, is grabbing the market’s attention. Unsurprising to see stocks tanking as the labor market strength should quiet any Fed pivot talk for now, if not deal a severe knockout blow to the pivot party gang. Financial markets are super-sensitive to US labor market data, especially after the “Fed pivot” towards a pause in rate hikes came back into the conversation and has likely caught a few folks leaning the wrong way. — Stephen Innes, SPI Asset Management

A lack of suitable workers continues to constrain the economy with job vacancies exceeding the number of unemployed Americans by more than four million. With core inflation set to rise further next week, a 75bps Fed hike on November 2 is virtually assured. The weakness in participation is primarily due to older (55+) workers not having returned to the workforce, which suggests early retirements or possible health worries remain a major factor behind the lack of workers to fill vacant job positions. The Fed has more work to do to slow the economy in order to get inflation under control. — James Knightley, ING

Despite the moderation of hike sizes and market support from central banks overseas, the FOMC’s mandate is a domestic one, and while monetary policymakers are attuned to the impact that higher rates and a strong dollar are having on the global economy, these factors will not prevent the Committee from reaching their telegraphed 4.6% terminal rate. Ongoing strength in the labor market is what will keep the Fed tightening. The de-wealthing effect of lower equity valuations and home prices remains very much top of mind, and while there was once a time when stocks down >25% would have inspired a tone change from the FOMC, the inflationary paradigm still leaves that pain point much lower. — Ben Jeffery and Ian Lyngen, BMO

The JOLTS survey showed a lower level of job openings and weekly jobless claims rose. But the services ISM held up better than feared and the labor market report was in-line with expectations, but also showed a falling participation rate, which dragged unemployment down. That puts paid to pivot talk, supports Fed rate hike expectations, bond yields and the dollar. On we go to PPI, CPI and retail sales data next week. The likelihood of another solid 0.5% monthly increase in core CPI, taking the annual rate to 6.5%, doesn’t suggest the FOMC will be feeling relaxed enough to raise rates by less than 75bps in November. The dollar will likely retain its bid. — Kit Juckes, SocGen