US: The Fed’s recalibration. Echoing Fed Chair Jerome Powell, Richmond Fed President Thomas Barkin explained that the Fed’s 50 bps cut in September was not a response to a troubled US economy, but a recalibration to a less restrictive monetary stance. Since the Fed’s final rate hike to 5.25-5.50% in July last year, US inflation has declined closer to the 2% target amid a cooling labour market. US PCE inflation fell to 2.2% y/y in August from 2.5% in July, below the Fed’s revised forecast of 2.3% for 4Q24. On a m/m basis, both headline and core inflation decreased slightly over the comparable period. Next week’s CPI inflation should also moderate in monthly terms.

On the labour market, the Automatic Data Processing (ADP) Research Institute reported that the private sector added 143k jobs in September, beating the 125k consensus, while August’s data was revised to 103k from 99k. However, the ADP Research Institute noted that stronger hiring was not accompanied by stronger pay growth. Meanwhile, ISM Manufacturing employment fell to 43.9 in September, near its four-year low of 43.4 in July. In tonight’s (4 Oct) jobs report, US unemployment rate for September will likely be unchanged at August’s 4.2%; nonfarm payrolls should stay subdued at 145k in September, slightly above the 142k posted in August.

The jury is still out for the next Federal Open Market Committee meeting in November where the market is factoring in 38% chance of another 50 bps cut. While the Fed did move aggressively in September, there is no guarantee that the Fed would have to cut by the same magnitude again with Fed Chair Powell indicating that there is no preset path to easing. A further drop in inflation would provide more leeway for the Fed to act, but would probably not add urgency for accelerated easing. Aside from economic fundamentals, sentiment matters. The current backdrop of Fed easing and hopes from Chinese stimulus is a buoying sentiment. With financial conditions still loose, it is not obvious that the Fed would need to go even faster than currently priced-in in order to boost the economy.

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