Fed's Aggressive Rate Cuts Face Skepticism

Following the Federal Reserve's September interest rate meeting,the U.S.stock market has achieved a four-week winning streak.The shift in monetary policy has boosted market risk appetite,while new signs of a strong labor market have eased concerns about an economic recession,causing expectations for aggressive rate cuts to recede.

In the coming week,geopolitical factors remain significant and cannot be ignored,with inflation and the earnings season becoming key factors affecting market trends.

The prospect of a soft landing in the U.S.is reinforced

The resilience of the U.S.economy once again brightens the prospect of a soft landing.

As the most closely watched indicator last week,the U.S.Department of Labor reported that 250,000 new jobs were added in the U.S.in September,far exceeding market expectations,with upward revisions to job growth in August and July.The unemployment rate,which had previously caused concern,fell from 4.2% to 4.1%.

Furthermore,the latest Job Openings and Labor Turnover Survey (JOLTS) showed that job openings in the U.S.rose to a three-month high of 8.04 million in August.The hiring rate fell to 3.3%,matching the lowest value since 2013,excluding the initial data from the 2020 pandemic.The service sector,a pillar of the economy,grew at its fastest pace in a year and a half,with the Institute for Supply Management (ISM) September services index climbing to 54.9%,the highest level since February 2023.

Bob Schwartz,a senior economist at Oxford Economics,told First Financial Daily reporters that the September employment report was much better than expected,with wage growth accelerating.On the other hand,he believes that the strong ISM services index is another signal that the economy is still expanding rapidly,"Consumer spending continues to grow at a strong pace and should be well supported this year and next as the financial environment eases.There is still a lot of room for improvement once political uncertainty subsides."

Interest rate pricing has changed,with medium and long-term U.S.Treasury yields rising strongly.The two-year U.S.Treasury,closely linked to interest rate expectations,rose by 36.7 basis points to 3.93% for the week,the largest increase in 16 months.The benchmark 10-year U.S.Treasury rose by 22.9 basis points to 3.98%.According to the Chicago Mercantile Exchange's Fed Watch,the possibility of a 25 basis point rate cut in November has risen to nearly 90%.

Barclays believes that the latest non-farm report has disrupted the view that labor demand is losing momentum,reinforcing the sustained resilience of economic activity and the possibility of a soft landing.The bank expects the Federal Reserve to cut rates by 25 basis points at its policy meetings in November and December this year.

It is worth noting that Federal Reserve Chairman Powell also cooled the prospect of aggressive easing in his latest speech last week."Overall,the economic conditions are good,and we intend to use our tools to keep them there.If the economy develops as expected,there will be two more cuts by the end of the year,totaling 50 basis points," he said.Schwartz told Yicai that,given the Federal Reserve's focus on the labor market when considering future rate cuts,strikes will confuse employment data and may complicate its decision-making.However,the overall impact is temporary,and the labor market and economy are healthy enough to support a 25 basis point rate cut at the November meeting.

Market sentiment remains optimistic

U.S.stocks continued the rebound that began in mid-September.As of last Friday's close,the Dow Jones Industrial Average set its 34th record close of the year.The S&P 500 is less than 1% away from its all-time high.

Dow Jones Market Statistics showed that there was some divergence across sectors last week.A surge in crude oil futures pushed the energy sector up by 7%,followed by a 2.2% increase in communication services.Utilities and financials,industrials,and technology stocks also rose,while materials and real estate sectors,which led the previous week,were the laggards.The technology sector was in focus,with OpenAI announcing a new round of financing of $6.6 billion,valuing the company at $157 billion post-investment,and several institutions raising their target prices for Meta.

In terms of market sentiment,Bank of America's cross-asset bull market indicator,which quantifies investor sentiment through fund flows,positioning data,and market technicals,rose from 5.4 to 6,marking the largest weekly increase since December 2023,indicating that investor sentiment remains optimistic.The bank said this was due to strong inflows into emerging market stocks and robust technical indicators in the credit market.

According to the schedule,the third-quarter earnings reports for U.S.stocks are expected to officially begin next week,with JPMorgan Chase,Wells Fargo,and BlackRock leading the charge.

Goldman Sachs' Chief U.S.Equity Strategist,David Kostin,released a report stating that the expected earnings per share for the S&P 500 in 2025 have been raised from $256 to $268,an 11% increase over the previous year.Considering the expected profit growth for 2025,the 12-month target for the S&P 500 has been raised from 6,000 to 6,300 points.

In its market outlook,Charles Schwab wrote that U.S.stocks were hit last week by developments in the Middle East and a strike at East Coast ports.It is important to note the potential impact of recent events on future inflation,which could translate into higher prices,thereby complicating the Federal Reserve's work and leading to higher market volatility.Currently,inflation data has been moving in the direction of the Federal Reserve's target,with a solid economic foundation,and market participants seem to agree with the Fed's slower pace of easing.

The institution believes that there are many potential market drivers in the coming week,such as monthly inflation data (the Consumer Price Index on the 10th and the Industrial Producer Price Index on the 11th) and the third-quarter earnings season.Stronger-than-expected U.S.economic data seems to be the main driver of the stock market's recent trend and is expected to further push the market higher.However,according to information obtained at the Barclays Global Financial Services Conference in September,caution is advised regarding the earnings reports of large banks.It is worth mentioning that FactSet currently forecasts a profit growth of 4.6% for the S&P 500 in the third quarter,down from 7.8% at the beginning of the quarter.