The upshot: soft landing on track and the Fed cuts in December.
Given the economic and political uncertainties ahead, the Fed and Chair Powell will favor a strategy of sounding hawkish while acting dovish. We expect the Fed to continue to gradually cut rates, but to do it with the threat of pausing at any moment.
Powell’s own comments confirm our original framework that predicted the 50bps cut - they were focused on arresting negative momentum before it got uncontrollable. Their strategy worked perfectly.
We currently have peak US growth optimism resulting from the “hope and change” from Trump 2.0. The challenges and disruptiveness of Trump policies are underestimated and will soon temper unbridled growth optimism. As such, the risks to inflation and growth are balanced and mutually offsetting. The 10y yield will continue to edge lower as the term premium recedes.
“Schrödinger’s Recession” may be exiting its quantum superposition. It seems that we are getting increasing clarity into the realization of the soft landing that we spoke about back in July, despite numerous oscillations between hard/no/weird/whatever landings. The NFP print adds yet another supporting piece of evidence that we don’t need to be afraid of solid growth due to inflationary concerns, nor do we need to panic about an overshoot to the downside.