The non-farm report unexpectedly stalled! The probability of the Federal Reserve (FED) cutting interest rates in December plummeted from 94% to 30%.

As investors increase their bets that The Federal Reserve (FED) will keep interest rates unchanged, the dollar has recorded its best single-day performance since the end of September. The U.S. Bureau of Labor Statistics stated that due to the longest federal government shutdown in U.S. history, the agency will not release the complete U.S. non-farm payroll report for October, and the release date for November employment data has been postponed from the originally scheduled December 5 to December 16.

Non-farm payroll report halt triggers The Federal Reserve (FED) decision-making blind spot

The U.S. Bureau of Labor Statistics announced on November 19 that due to the longest federal government shutdown in U.S. history, the agency will not be releasing the complete U.S. non-farm payroll report for October. The Bureau of Labor Statistics stated that the non-farm employment data for October will be released alongside the complete report for November. Due to the shutdown, the related data was “unable to be collected”, and the unemployment rate for October will not be included in these figures.

In addition, the agency has postponed the release date of the November employment data from the originally scheduled December 5 to December 16. The new release date is six days later than the last policy meeting of the Federal Reserve (FED) this year - which means that the economic data available for the Federal Reserve (FED) to reference in decision-making will be more limited. The delayed September non-farm payroll report is scheduled to be released this Thursday.

Bloomberg pointed out that the U.S. Bureau of Labor Statistics stated that the November non-farm report will be released on December 16, nearly a week after the Federal Reserve (FED) meeting. In the absence of this report and the October non-farm report, the Federal Reserve (FED) will lose important data references needed for policy-making. This data vacuum poses a significant challenge to the Federal Reserve's (FED) decision-making, as non-farm employment data is a key indicator for assessing economic health and labor market resilience.

The minutes of the Federal Reserve's meeting held on October 28-29, released on Wednesday, showed that despite the Federal Reserve's decision to cut interest rates last month, there were differing opinions among decision-makers, and they warned that lowering borrowing costs could undermine efforts to curb inflation. The minutes indicated that some Federal Reserve officials were cautious about further rate cuts, concerned that prematurely easing monetary policy could reignite inflationary pressures. In this context, the absence of non-farm payroll reports makes it more difficult for the Federal Reserve to assess the necessity and timing of rate cuts.

Aroop Chatterjee, a strategist at Wells Fargo in New York, stated, “Due to the lack of timely data, the likelihood of maintaining the Intrerest Rate has increased. Unless the September data is exceptionally weak, I believe most decision-makers will opt to stay put in December.” This viewpoint reflects the market's expectation that the Federal Reserve (FED) is more likely to act cautiously in the absence of data.

The market turmoil as the probability of interest rate cuts plummeted from 94% to 30%

In the context of lacking complete data for October and recent hawkish remarks from some Federal Reserve officials, traders are adjusting their expectations for further rate cuts. The CME's “FedWatch” tool shows that traders currently believe there is only about a 30% chance of a rate cut in December, down from nearly 50% on Tuesday, and about a month ago, this probability was as high as 94%.

The drastic change in this probability reflects a rapid correction of market expectations. From 94% to 30%, the expectation of interest rate cuts plummeted by 64 percentage points in just one month, which is extremely rare in the history of The Federal Reserve (FED) policy expectations. The driving factors behind this change include multiple layers: firstly, the delay and absence of non-farm reports leave the FED lacking critical data support; under increasing uncertainty, the FED is more likely to choose to maintain the status quo.

Secondly, recent hawkish remarks from some officials of The Federal Reserve (FED) have also influenced market expectations. These officials emphasize that the inflation risk has not been completely eliminated, and an early rate cut could undermine previous efforts. Thirdly, the overall U.S. economic data still shows resilience; although the job market has slowed, there has not yet been a noticeable deterioration, which reduces the urgency for The Federal Reserve (FED) to cut rates immediately.

Three Major Driving Factors Behind the Plunge in Interest Rate Cut Expectations

Data Vacuum: October non-farm misses, November non-farm delayed until after The Federal Reserve (FED) meeting, decision-making lacks key reference.

Officials' Hawkish Shift: Several Federal Reserve officials warn of the risks of rate cuts, emphasizing that controlling inflation is the priority.

Economic resilience exceeds expectations: Despite the slowdown in growth, employment and consumption data still indicate robust economic fundamentals.

The market's adjustment of expectations for interest rate cuts is also reflected in the price movements of other financial markets. The changes in the US Treasury yield curve, the surge in the dollar index, and the plunge in gold prices are all direct manifestations of this shift in expectations.

The US dollar sees the largest surge since September, gold plummets

(Source: Bloomberg)

The Bloomberg Dollar Spot Index rose 0.5% on November 19, marking the largest gain since September 25, and closed at its highest level in over two weeks. Due to the strong rise of the dollar, gold prices experienced a sharp drop during the New York trading session on Wednesday. In early trading on Wednesday in New York, gold prices surged to $4132.86/ounce, reaching an intra-day high. Subsequently, gold prices suddenly plummeted, hitting a low of $4055.53/ounce. As of Wednesday's close, spot gold was only up 0.26%, quoted at $4077.93/ounce. Gold prices had earlier risen over 1% during the session.

Bank of America strategist Alex Cohen stated on Wednesday: “The rebound performance of the dollar today is quite remarkable. I believe there is still a certain degree of upside asymmetry for the dollar, as the market still needs data to justify a rate cut in December.” The strong performance of the dollar stems from rising market expectations that The Federal Reserve (FED) will keep interest rates unchanged, which enhances the relative attractiveness of dollar assets.

Cohen from the American Bank stated that even before the U.S. Bureau of Labor Statistics released its news, several factors had driven the U.S. dollar stronger, including concerns over the UK’s fiscal outlook, which has put pressure on the British pound ahead of the UK budget announcement next week. The GBP/USD fell 0.7% on Wednesday, marking its fourth consecutive trading day of decline and setting the longest losing streak since October 24. Meanwhile, the New Zealand dollar dropped to its lowest level since April, nearly wiping out all its gains for the year. The Japanese yen fell as much as 1.1% to 157.18 against the U.S. dollar, marking its weakest level since mid-January.

The sharp fluctuations in gold prices reflect the market's rapid adjustment of expectations regarding The Federal Reserve (FED) policies. As a non-yielding asset, gold typically faces selling pressure when interest rate expectations rise. When the market shifts from anticipating a rate cut in December to expecting rates to remain unchanged, the opportunity cost of holding gold increases, prompting investors to reduce their positions. The price plummeted from an intraday high of $4132.86 to a low of $4055.53, a drop of $77, which is extremely rare in the gold market.

September Non-Farm Payrolls Become the Sole Reference as The Federal Reserve Faces Dilemma

The U.S. Bureau of Labor Statistics will release the non-farm payroll report for September on Thursday. With the longest federal government shutdown in U.S. history coming to an end, various government agencies are beginning to release economic data. In the absence of non-farm data for October and November (prior to the meeting), the September non-farm report has become the only employment data available for reference before the Federal Reserve's December meeting, significantly amplifying its importance.

The market has highly diverging expectations for the September non-farm payrolls. Some analysts believe that the September data may show a continued slowdown in the labor market, with a slight increase in the unemployment rate, which would provide some support for interest rate cuts. However, another group of analysts believes that even if the September data is weak, the Federal Reserve (FED) would find it difficult to make a rate cut decision based solely on a single month's data due to the lack of confirmation data for October and November.

Chatterjee of Wells Fargo emphasized that most decision-makers would choose to stand pat in December unless the September data shows unusually weak results. This “unusually weak” could refer to extreme situations such as a significant rise in unemployment, non-farm payrolls falling significantly below expectations, or a sharp decline in the labor participation rate. Weak data that falls within the normal range may not be sufficient to convince The Federal Reserve (FED) to rashly cut interest rates in the face of incomplete data.

The dilemma faced by The Federal Reserve (FED) is that, on one hand, if the economy is indeed slowing down, delaying interest rate cuts may exacerbate the risks of economic downturn; on the other hand, cutting interest rates in the absence of complete data may be seen as a policy mistake, especially if subsequent data shows that the economy is more resilient than expected.