- The US monthly employment report revealed a jump in job growth.
- Markets are seeing a 14% chance of a Fed pause in November.
- Investors fear a broader war in the Middle East.
Equities fell by 1% on Monday as market participants absorbed the sudden shift in the Fed’s rate cut outlook. At the same time, fears arose that the escalating Middle East tensions would increase oil prices and affect the global economy.
On Friday, the US monthly employment report revealed a jump in job growth and a lower unemployment rate. The US economy added 254,000 workers in September, well above estimates of 140,000. Meanwhile, the unemployment rate fell to 4.1%, below expectations of 4.2%.
At the last policy meeting in September, the Federal Reserve lowered borrowing costs by an unexpected 50-bps. The massive cut came in response to weaker employment data, especially rising unemployment rates. As a result, markets started pricing more aggressive moves in November and December, which boosted equities.
However, Powell dashed these hopes when he noted that the Fed would continue cutting rates at a gradual pace. He forecasted two more cuts in 2024, totaling 50-bps. Nevertheless, traders were still pricing an over 30% chance of a significant cut in November.
However, after Friday’s employment figures, this likelihood dropped while that of a smaller cut surged past 90%. Currently, markets are seeing a 14% chance of a pause in November. A gradual pace will likely hurt equities in the near term. Still, as interest rates drop, businesses will grow, brightening the long-term outlook for stocks.
The market focus has now shifted to the US CPI report. Analysts predict a drop to 2.3% in the annual headline figure. However, the Fed’s focus has moved from inflation to growth. Therefore, the inflation figures might not significantly change the outlook for rate cuts.
The decline on Monday also came from fears of a broader war in the Middle East. Last week, Iran attacked Israel with over 200 missiles, putting investors on edge due to a possible retaliation. Meanwhile, on Monday, Hezbollah fired rockets at Israel. A wider war involving Iran could increase oil prices and have a significant economic impact.
Q3 earnings estimates (Source: Bloomberg Intelligence)
Investors were also preparing for the third quarter earnings, starting with major banks this week. However, the outlook is dull, and estimates are falling.
