ATFX: The U.S. job market is cooling, and the call for interest rates to peak is growing stronger. The timing and intensity of interest rate cuts next year will depend on the impact of financial tightening

Federal Reserve President Powell may have slept the most soundly last week. US non-farm payrolls and PCE inflation data show that employment growth is slowing but still strong, wage growth has fallen to the lowest level in seven months, core PCE inflation has only increased slightly, more workers have entered the job market, and the number of new jobs created is still high but back to the level of 2021. This is properly the rhythm of a soft landing, and the Goldilocks in the market are once again calling for the economy to be neither too cold nor too hot, and monetary policy does not need to be tightened further. The risk of a September rate hike by the FOMC has largely disappeared, and the probability of another rate hike in the fourth quarter of this year implied by interest rate futures market prices has also fallen below 40%. President Biden also took the opportunity to pump water, saying his administration's efforts have led to lower inflation and continued increases in employment and wages.

On the expectation of a soft landing, global stock and bond markets rebounded sharply. US and European stocks recorded rare weekly gains in recent months, and the yield on US two-year Treasury bonds fell decisively to below 5%. The dollar index was high above 104, and the fear index VIX sank to 13. Crude oil prices rose sharply, natural gas prices fell, most industrial metals were good, and gold prices rose. The yen fell to 146 against the dollar, and the pound appreciated to 1.26 against the dollar.

The US labour market created 187k non-farm jobs in August, with the unemployment rate rising to 3.8% and hourly earnings rising 0.2% month-on-month. All three figures were weaker than analysts' forecasts, with the jobs data again pointing to slower growth, but the chances of a recession remain slim. The biggest surprise was a 0.7% month-on-month rise in aggregate earnings (which are affected by a combination of wage growth and employment), suggesting that US consumption was supported by income growth and did not suffer too much from policy tightening, enough to support the strength and resilience of the economy.

The second surprise is that a whopping 736k job seekers have entered the workforce, pushing the labor participation rate back to pre-epidemic levels, and the blue-collar labor shortage is expected to be fundamentally resolved. In his recent speech, Powell locked the policy core on core inflation, which is mainly caused by rapid wage increases. The recovery in participation rates will help ease policymakers' anxiety about inflation in the service sector.

A month of employment and inflation data is not enough to see the overall changes in the economy, not to mention the August data is mixed with noise such as show business strikes and transportation layoffs, but these give monetary policymakers more confidence to wait and see. The US interest rate hike cycle is nearing an end, and policy making cannot be deduced according to the preset script. Whether there will be a final interest rate hike in the fourth quarter is still uncertain. It all depends on the data in the next few months. However, I believe that US interest rates have a good chance of peaking.

According to the available data, the US economy is slowing down, but a recession is not inevitable, and the possibility of a soft landing is higher, which is why the market believes that interest rates will stay at high levels for a longer time. In my opinion, the main driving force that finally prompted the Federal Reserve to start cutting interest rates may not be growth and employment reasons, but the financial imbalances caused by the credit crunch. The federal interest rate soared from zero to 5.25-5% in 18 months, which is also rare in history, and the sharp increase in the cost of capital is bound to pose a heavy burden on some sectors. Commercial real estate is an area of anxiety. 5.60 trillion-dollar-sized commercial real estate began to enter the peak period of debt repayment at the end of this year, and the main providers of capital, small and medium-sized banks, are now more financing capacity than they used to be.

Changing the topic, at the Jackson Hole Federal Reserve's annual meeting, the heads of central banks in the United States, Europe, Japan and the United Kingdom pointed out the threat of long-term inflation, and threatened that policy interest rates may stay at high levels for a longer time. Indeed, the job market, energy structure and global industrial chain have all undergone significant changes in recent years, making the current cost structure and inflation momentum very different from before the epidemic. The logic behind price increases may be different from before. This raises a key question, whether the 2% inflation policy target set by central banks in the past is still reasonable, and whether the logic behind it still holds.

Furthermore, the current policy structure is also very different from that before the epidemic. After 2008, the United States and Europe have adopted a policy mix of loose money and tight fiscal, monetizing debt by creating liquidity, but maintaining fiscal discipline. After the epidemic, the policy mix was changed to loose money and loose fiscal, creating a huge fiscal deficit, which was eventually digested by the central bank's credit expansion, which triggered severe inflation. Monetary policy began to tighten rapidly last year, but fiscal policy is still very loose, and new imbalances are emerging in the economy under the tight money and wide fiscal pattern. Monetary policy and fiscal policy are two sides of the same coin. If fiscal policy does not contract, monetary policy cannot continue to contract. This is the deep-seated reason why I believe that global monetary policy will be relaxed in 2024.