The likelihood of the U.S. Federal Reserve delivering a 50 basis point rate cut has diminished following a much stronger-than-expected jobs report, Danske Bank said in a note Monday.
The latest U.S. employment data revealed non-farm payrolls grew by 254,000 in September, significantly surpassing both Danske’s forecast of 160,000 and the consensus estimate of 150,000.
Average hourly earnings also rose by 0.4% month-over-month, outpacing forecasts of 0.2%.
The unemployment rate dropped to 4.1%, better than the anticipated 4.2%, noted Danske Bank in its morning report.
The positive labor market data led to a surge in U.S. Treasury yields, with 2-year yields rising over 20 basis points and 10-year yields increasing by more than 10 basis points. The EUR/USD pair fell below the 1.10 mark, closing Friday at 1.098.
As a result of this stronger-than-expected jobs report, markets have pulled back from speculating on a more aggressive 50 basis point rate cut from the Fed.
“Markets pulled back from speculating in another 50bp cut from the Fed and are now very closely aligned with our call for both 2024 and 2025 in terms of Fed pricing,” stated Danske Bank.
The report also highlighted that the robust jobs data has provided support to the “soft-landing” scenario for the U.S. economy. Global equities saw a sharp rise, with U.S. indices like the S&P 500, Nasdaq, and Russell 2000 all posting gains on Friday.
Small caps, in particular, outperformed, benefiting from reduced recession fears and higher yields.
Overall, the bank feels the strong labor market performance suggests the Fed is less likely to implement a 50bps rate cut, and markets are pricing in more modest adjustments going forward.
