BOFA SAYS “NO MORE RATE CUTS UNDER POWELL” AS LABOR DATA SIGNAL LIMITED ROOM FOR FED EASING

INVESTOR EXPECTATIONS FOR A DECEMBER RATE CUT REMAINED NEAR RECENT LOWS AFTER LONG-DELAYED U.S. LABOR MARKET DATA DELIVERED A MIXED READ ON THE ECONOMY’S MOMENTUM.

THE SEPTEMBER NONFARM PAYROLLS REPORT, THE FIRST RELEASED SINCE THE GOVERNMENT SHUTDOWN FROZE FEDERAL STATISTICS FOR WEEKS, SHOWED STRONG HEADLINE GAINS BUT SOFTER UNDERLYING METRICS. THE SPLIT REAFFIRMED THE VIEW THAT THE FEDERAL RESERVE HAS LIMITED ROOM TO EASE FURTHER.

THE ECONOMY ADDED 119,000 JOBS IN SEPTEMBER, MORE THAN DOUBLE THE 50,000 EXPECTED BY ECONOMISTS. BUT THE UNEMPLOYMENT RATE TICKED UP TO 4.4% FROM 4.3%, THE HIGHEST LEVEL SINCE OCTOBER 2021.

THE CONFLICTING SIGNALS KEPT MARKETS ON EDGE, WITH TRADERS MAINTAINING LOW ODDS OF A DECEMBER MOVE. THOSE ODDS EDGED HIGHER ON FRIDAY AFTER NEW YORK FED PRESIDENT JOHN WILLIAMS SAID HE COULD SUPPORT A CUT AT THE NEXT MEETING.

WILLIAMS SAID HE STILL SEES “ROOM FOR A LITTLE MORE ADJUSTMENT IN THE NEAR TERM” TO BRING POLICY CLOSER TO NEUTRAL. HIS COMMENTS INTRODUCED A MORE DOVISH TONE INTO MARKET PRICING, BUT DID NOT FUNDAMENTALLY SHIFT THE EXPECTED RATE PATH.

BOFA: “NO MORE CUTS UNDER POWELL”

BANK OF AMERICA ECONOMIST SHRUTI MISHRA ARGUES THAT THE BROADER LABOR MARKET BACKDROP WILL ULTIMATELY DRIVE THE FED’S DECISIONS. THE BANK NOTES THAT MUCH OF THIS YEAR’S LABOR-MARKET SOFTNESS HAS STEMMED FROM BOTH SUPPLY AND DEMAND DISRUPTIONS. PAYROLL GAINS COOLED OVER THE SUMMER AND UNEMPLOYMENT EDGED HIGHER, BUT MISHRA EMPHASIZES THAT THE JOBLESS RATE REMAINS HISTORICALLY LOW.

IN ITS LATEST OUTLOOK, BOFA HIGHLIGHTS A SHARP DROP IN LABOR SUPPLY AHEAD, DRIVEN BY MUCH TIGHTER IMMIGRATION POLICY. MISHRA ESTIMATES THAT NET IMMIGRATION WILL FALL TO ABOUT 380,000 NEXT YEAR, WELL BELOW THE 2.1 MILLION AVERAGE SEEN FROM 2020 THROUGH 2023. THAT SHORTFALL TRANSLATES INTO A LABOR-SUPPLY SHOCK EQUIVALENT TO ROUGHLY 90,000 FEWER WORKERS PER MONTH COMPARED WITH RECENT TRENDS.

WITH FEWER WORKERS ENTERING THE LABOR FORCE, MISHRA EXPECTS THE “BREAKEVEN” PACE OF JOB GROWTH, THE LEVEL NEEDED TO KEEP UNEMPLOYMENT STABLE, TO DROP TO ABOUT 20,000 PER MONTH. THIS DYNAMIC, SHE SAYS, WILL KEEP THE JOBLESS RATE RELATIVELY STEADY EVEN AS PAYROLL GAINS SLOW.

BOFA SEES ONLY A MODEST UPTICK IN UNEMPLOYMENT, PEAKING AROUND 4.5% IN EARLY 2026, AND ARGUES THAT THE LABOR MARKET WILL REMAIN CLOSE TO FULL EMPLOYMENT.

AS A RESULT, THE BANK BELIEVES THERE IS “LIMITED SCOPE FOR THE FED TO CUT RATES FURTHER,” ADDING THAT STICKY INFLATION REINFORCES ITS VIEW THAT “THERE WILL BE NO MORE RATE CUTS UNDER CHAIR POWELL.”