While many traders are holding their breath in anticipation of rate cuts, the situation surrounding them couldn’t be more uncertain.
Certain outlets, such as Reuters and Bloomberg, were confident about a rate cut until recently. They rolled back those expectations, only to raise them again after New York Fed President John Williams commented on the possibility of imminent cuts.
Currently, Reuters predicts a 60% chance of a rate cut, which would lower borrowing rates to 3.75%.
However, many difficulties and unknowns remain. There doesn’t seem to be internal agreement within the Fed, and economic data is either conflicting or missing.
Furthermore, a potential December rate cut would be the third one this year, following back-to-back cuts in September and October.
This could endanger the economy by reigniting inflation and weakening the USD even further, especially given its already rough performance against other major currencies throughout the year.
Let’s break down some recent news to try and get a clearer picture of the difficulties and what may happen.
Fed Rate Cuts Uncertainty and Mixed Job Data Risks
Nonfarm Payrolls Rise as Rate Cuts Debate Intensifies
A delayed September report from the BLS shows that Nonfarm Payrolls rose by 119,000, following a revised 4,000 decline in August. This exceeded expectations, as a Dow Jones forecast targeted a 50,000 increase.
Unemployment Climbs Amid Growing Rate Cuts Uncertainty
However, the unemployment numbers also increased to 4.4%. This shows the highest unemployment rate since October 2021. According to a broader measure that includes those not working part-time or looking for jobs, the number inched downwards to 8%.
Earnings Deliver Mixed Signals
Earnings also had mixed performances. Average hourly earnings grew by 0.2% for the month and 3.8% in year-on-year data. This comes under monthly expectations of 0.3% and outperforms yearly data forecasts at 3.7%.
Impact of Government Shutdown on Labour Data
This report ended an extended period without any labour market information. The period started in early September and lasted throughout the recent US government shutdown, which included the BLS, Bureau of Economic Analysis, and other relevant bodies, preventing them from collecting, processing, and publishing data.
Where the Job Gains and Losses Came From
Most of the job gains come from the expected sources. Health care is at the forefront, with 43,000, followed by bars and restaurants with 37,000, and social assistance with 14,000. However, a traditionally large contributor, federal government employment lost 3,000, a part of a broader trend this year, which resulted in 97,000 positions lost. Transportation and warehousing also lost 25,000.
Stock Markets React Positively to the Data
Stock markets reacted positively to the data, which shows a gradual but steady progression. The S&P grew 1.63%, the Dow Jones Industrial Average climbed 1.27%, and the Nasdaq Composite, on the back of strength in the tech sector, measured the largest expansion at 2.18%.
Lingering Concerns About Data Accuracy and Timing
However, there are still some concerns. The first, of course, is that this data isn’t indicative of the current situation within the US. As such, the situation could change rapidly, since the BLS could not release data for October individually, and will instead do a batch release for October and November together.
Additionally, this is the second report since Trump fired ex-BLS Commissioner Erika McEntarfer on 1 August, due to corrections for data released previously, which showed weaker results than the ones initially published.
Some market participants now question the credibility of BLS data and whether the agency has full freedom to publish figures that might appear unfavorable.
Fed Won’t Get Inflation Data Before Rate Cuts Decisions
Along with cancelling the jobs data report for October, the BLS has opted not to release inflation data for the month either. Furthermore, the November CPI data was pushed from 10 December to 18 December, which is after the next Fed meeting, falling on 9-10 December.
The BLS cited the inability to collect and process data as the primary reason for the cancellation and postponement. It compiles data through various methods, including personal visits and phone calls. These, however, weren’t possible to conduct during the government shutdown. Similarly, the online data and household surveys used to gather information are difficult to correct accurately when searching retrospectively.
Further complicating matters, the Commerce Department’s Bureau of Economic Analysis said it will reschedule the personal consumption expenditures (PCE) price index, but has not announced a date.
This makes it more difficult for the Fed to collect data, as it uses the PCE price index as its primary forecasting tool.
Fed Opinions Mixed
Fed officials are worried about the unclear data environment. For them, it’s difficult to formulate monetary policy when not working off specific information.
Fed Chair Jerome Powell favoured caution in a recent statement.
“This is a temporary state of affairs. And we’re going to do our jobs, we’re going to collect every scrap of data we can find, evaluate it, and think carefully about it.” He also added, “What do you do if you’re driving in the fog? You slow down. … There’s a possibility that it would make sense to be more cautious about moving.”
The restrictiveness of current policy remains under debate. Some Fed officials say October’s quarter-point cut still leaves growth constrained, while others disagree.
Public statements show the FOMC is split. Some are inflation doves. They favor rate cuts to support the labour market. Hawks are concerned. They worry cuts could derail inflation progress. Even moderates lack consensus. Conflicting claims come from John Williams and Jerome Powell.
What Could Happen in The Forex Market?
It’s very difficult to predict what the following meeting has in store for the USD. Traditionally, rate cuts often weaken a currency, but it depends on the opinions of economic growth expectations. Added uncertainty comes from the fact that the odds of a rate cut are far from conclusive.
Betting on either a cut or a lack of one is a coin flip, and taking the wrong stance can backfire tremendously. However, one thing is for certain: USD trading in December will be a highly volatile environment. Not only will the Fed’s decision upturn markets, but it will be followed by economic reports that cover two months and clear the fog that traders have been working in, potentially causing massive shifts.
Penafian: This material is for general informational and educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked in this communication.