Citi analysts said in a report on Tuesday that while recent labor market data may have caused some market participants to reconsider their expectations for a Fed rate cut, the likelihood that the Fed will skip a rate cut during its November meeting is low.

Although nonfarm payrolls rose sharply by 254,000 last Friday, higher than economists expected by 140,000, the analysts noted that "we suspect that the strong employment report released last Friday may not be sustained."

“A string of weak labor market data has led markets to expect the Fed to cut rates by at least 25 basis points at each meeting, with a larger 50 basis point cut likely,” Citigroup said.

“The bar for not cutting rates in November is high, as one month of labor market data does not convincingly reduce the multi-month buildup of downside risks across multiple data sets,” Citigroup economists said in a note Monday. “We believe that labor market slack will re-emerge in the coming months, that overall inflation trends are still slowing, and that Fed officials have another 50 basis points of rate cuts to come by December.”

However, Citi analysts also acknowledged that the stronger-than-expected data from the core consumer price index (CPI) that unexpectedly rose 0.3% month-on-month last month has fueled a more hawkish narrative, complicating the outlook for rate cuts.

Citigroup expressed doubts about the sustainability of recent job gains, noting that the increase in government payrolls may not continue.

They further elaborated that while the upcoming October jobs report is expected to show weakness, the market's reaction may attribute this weakness to temporary factors such as Hurricanes Milton and Helena, which may obscure the true condition of the labor market until the jobs report is released in early December.

Citigroup predicts that even in the face of stronger inflationary pressures, Fed officials are likely to pursue a strategy aimed at returning interest rates to a neutral level. They believe that at least a 25 basis point rate cut is needed in November, and said: "While a stronger core CPI reading may be seen this week, we do believe that inflation will remain subdued in the coming months."

Citi added, "Weak global demand should keep a lid on goods inflation, while accommodative labor markets mean there is less risk of price increases in non-housing services."

Earlier, Federal Reserve Chairman Powell said that housing inflation was declining "slowly", but Fed officials still expected housing inflation to slow as long as the growth rate of rents and house prices slowed down.

Article forwarded from: Jinshi Data