Sep Non Farm Payroll data showed that worries about US employment were grossly misplaced. The July NFP (the beginning point of 50 bps cut narrative) was revised upwards to 144k (from the 1st print’s 114k), the Aug NFP was revised to 159k (from the 1st print’s 142k) & Sep NFP came at 254k against market estimates of 150k. The unemployment rate in Sep fell to 4.1% (4.051% unrounded) against market estimates of 4.2-4.3%. Average hourly earnings came stronger at 0.4%MoM against market estimates of .2% (Aug AHE were revised to 0.5% MoM from 0.4%MoM). So, in summary a broad hawkish surprise on employment front. These details were consistent with JOLTS data of Aug & initial jobless claims which have been sub 220k on a 4-week moving average. The Sep NFP report should solidify the case for the FOMC to slow its pace of easing to 25bp increments. In retrospect, the weak July employment report appears to have been a negative outlier, not the start of a sharp deterioration. Some officials may regret the decision to cut 50bp in September, and another strong CPI report next week could add further hawkish pressure. However, the fundamental rationale for easing remains intact, and a pause this year remains unlikely. We continue to expect two 25bp cuts for the remainder of this year and a further step down to a 25bp each meeting in Jan & March bringing the policy rate to 3.75-4.00% & then a status quo. We believe US economy never landed because of the huge fiscal spending (largest fiscal deficit in a non-war era since last 100 years). Fed’s 50 bps cut in Sep hence looks like a policy error which might have loosened financial conditions further, increased wage gains likely to reflect in core CPI services ex shelter soon & heated up an already strong US economy. With AHEs printing 0.5% & 0.4% MoM in Aug & Sep, we are likely to see reversal in core PCE too sooner than later. We like US equities specially consumer discretionary at this point of time as real incomes grow significantly. We do not have any strong view on US rates now. Post the US elections we might have a re look at the rate trajectory depending upon the new President’s policies.
