Goldman Sachs lowered its odds of a U.S. recession in the next 12 months by 5 percentage points to its long-term average of 15% after the latest nonfarm payrolls report showed a better-than-expected labor market.
The Labor Department reported Friday that the U.S. added the most jobs in six months in September and the unemployment rate fell to 4.1%.
In early August, Goldman Sachs raised the odds of a U.S. downturn to 25% from 15%, then cut that forecast to 20% in mid-August as the labor market and consumers showed resilience.
Jan Hatzius, chief U.S. economist at Goldman Sachs, said in a report on Sunday that the September jobs report "resets the labor market narrative" and eases concerns that labor demand "is falling too fast to prevent unemployment from rising." He said, "We have reduced the probability of a U.S. recession in 12 months to the unconditional long-term average of 15%."
The Wall Street brokerage maintained its forecast that the Fed will deliver two consecutive 25 basis point rate cuts, bringing the federal funds rate to 3.25%-3.5% by June 2025. "We now see a much lower risk of another 50 basis point cut from the Fed, and these data reinforce our belief that the Fed will slow the pace of rate cuts to 25 basis points in November," Hatzius said.
In September, the Federal Reserve cut its policy rate by 50 basis points to a range of 4.75%-5.00%, the central bank's first rate cut since 2020.
Ahead of the report, financial markets had raised the probability of a quarter-point rate cut in November to 95.2% from 71.5%, according to CME Group’s FedWatch tool.
While nonfarm payrolls are typically volatile, the Wall Street bank said the data can be viewed as "real" because there were no clear signs of a sustained negative revision.
Karl Schamotta, chief market strategist at Corpay, even believes that the scenario of the US economy not landing has suddenly become more credible. He pointed out that this is a beautiful employment report both in general and in the details inside. Over the past three months, job opportunities have continued to increase, the unemployment rate has gradually declined, and the participation rate has remained stable, "all of which indicates that this is not a statistical anomaly that may be eliminated in the coming months. Therefore, what this ultimately means is that Treasury yields have surged at the front end of the curve, expectations for rate cuts are retreating, and the expectation now is that the Fed will be more cautious in easing policy."
“More broadly, we see no obvious reason why job growth should be mediocre amid high job openings and strong GDP growth,” Hatzius said.
However, Goldman Sachs warned that October could be a particularly complicated month as both hurricanes and major strikes could lead to an "unusual" non-farm report.
The article is forwarded from: Jinshi Data