Morgan Stanley Bets on Fed's 25 Basis Point Rate Cut Amid Mixed Job Signals

Following the release of U.S. non-farm payroll data, Morgan Stanley maintained its forecast for a 25 basis point rate cut by the Federal Reserve next week. Over the past three months, the average monthly increase in non-farm jobs reached 173,000, surpassing the trends observed in the second and third quarters. Despite the robust job growth, there are signs of a slight cooling in the labor market, with the unemployment rate rising to 4.246%, partly due to a hiring slowdown and a reduction of 28,000 retail positions.

Morgan Stanley's report suggests that while the labor market remains strong, subtle signs of weakening are emerging, evidenced by a decline in employment-to-population ratio and labor force participation rate. Other financial institutions, including Macquarie, ABN AMRO, and Wells Fargo, also maintain the likelihood of a 25 basis point rate cut next week.

The recent employment report showed a significant rebound in job numbers for November, although the broader market seemed to disregard the mixed data. The industry-specific non-farm payroll numbers slightly beat expectations, but household survey data indicated a weakening trend, with a rise in unemployment and a decline in participation rates. Ahead of the December Federal Open Market Committee (FOMC) meeting, November's CPI figures are set to be a crucial indicator. Fed Chair Jerome Powell's recent statements emphasized a cautious approach to rate cuts, aiming to stabilize market expectations against the backdrop of already loose financial conditions. Thus, a 25 basis point cut remains the base case for December, with expectations for a steady pace of rate reductions continuing into the first half of 2025.

Meanwhile, the CME Group's data highlighted a progressively increasing probability for a 25 basis point rate cut at the December FOMC meeting, standing at 86% by December 8. Considering the resilient job market and persistent inflation, Fed officials, including Governor Bowman and Cleveland Fed President Hammack, advocated for a cautious approach to rate adjustments. If upcoming inflation data does not present a significantly different narrative, the probability remains high for a 25 basis point cut in December.