Fed's Rate Cut Cycle Over Before It Began: BofA Sees Shifts Towards Hikes

The Federal Reserve's rate-cutting cycle, which had barely begun, appears to be over, according to Bank of America (BofA) economists. This shift in expectations comes on the heels of a blowout jobs report that has markets reassessing the likelihood of further rate cuts and even considering the possibility of rate hikes. The strong labor market data has reduced the odds of a near-term Fed cut, with traders now pricing around 50 basis points (bps) of easing by year-end, down from around 75 bps two weeks ago.



The September jobs report was staggeringly strong, with the labor market adding 254,000 net new jobs last month, far higher than the 150,000 net jobs expected from forecasters. Additionally, there were upward revisions to the July and August numbers, a reverse from what we've seen over the last several months. Along with the strong job growth, the unemployment rate ticked down to 4.1%. Combined with data earlier in the week showing demand for workers is still healthy, the payrolls report is likely to alleviate concerns that the US labor market is deteriorating. Hence, markets are now pricing around 50bps of easing by year-end from the Fed, down from around 75bp two weeks ago.

The next test for Fed pricing and thus the US dollar is this week's US CPI inflation report. However, we doubt the data will reignite jumbo cut expectations, therefore the dollar should consolidate around current levels. Ultimately, so long as US economic exceptionalism keeps pushing back bets on Fed easing, the dollar's gains can extend further. But the resilience of the US economy and boosted soft-landing hopes should see global risk sentiment buoyed too. Couple this with China's recent stimulus measures, plus rising energy prices, G10 high beta currencies, especially those with positive exposure to higher commodity prices (AUD, CAD, NOK), should fare well against the dollar.

In conclusion, the strong jobs report has significantly altered the Federal Reserve's rate-cutting trajectory, with markets now pricing around 50bps of easing by year-end and considering the possibility of rate hikes. This shift in expectations has implications for various sectors, including Big Tech and insurance, as well as the overall market performance. As the Fed's rate-cutting cycle appears to be over, investors should closely monitor the economic data and the central bank's communication to adjust their expectations and portfolios accordingly.