Amid conflicting signals of inflation exceeding expectations and employment data weaker than anticipated, the journey of U.S. stocks to new highs has temporarily halted.

On October 10th, Eastern U.S. time, all three major U.S. stock indices closed slightly lower. The S&P 500 index fell by 0.21%, to 5,780.05 points; the Nasdaq index fell by 0.05%, to 18,282.05 points; and the Dow Jones Industrial Average fell by 0.14%, to 42,454.12 points.

The inflation and employment data were not favorable, but this does not mean they have overturned the overall outlook for robust economic growth and moderate inflation. The slightly higher-than-expected CPI data does not imply a new round of inflationary outbreaks, but a surge in initial jobless claims may increase market uncertainty in the short term.

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It should be noted that inflation above expectations and a weakening labor market did not significantly hit market confidence. Traders even increased their bets on a 25 basis point rate cut by the Federal Reserve in November. Why did the expectation of a rate cut rise instead of falling after the latest data was released?

The labor market's influence surpasses inflation.

Although the inflation data supports a more "hawkish" stance by the Federal Reserve, the employment data carries more weight, supporting the Federal Reserve's continued rate cuts.

On October 10th, data released by the U.S. Department of Labor showed that the U.S. CPI year-over-year growth rate in September decreased from 2.5% in August to 2.4%, a six-month decline and the lowest level since March 2021, with a month-over-month increase of 0.2%, slightly higher than expected; the core CPI in September grew by 3.3% year-over-year, a new high since June, with a month-over-month increase of 0.3%, also slightly exceeding expectations.

At the same time, the number of jobless claims has risen significantly. As of the week ending October 5th, the number of initial jobless claims rose to 258,000, a level not seen since August 2023, significantly higher than the previous week's 225,000 and the market expectation of 230,000. In addition, as of the week ending September 28th, the number of continued jobless claims rose to 1.861 million, higher than the market expectation of 1.83 million and the previous week's 1.819 million, indicating rising risks in the labor market.The increase in unemployment benefit applicants has many causes, such as the impact of Hurricane Helen and the ongoing month-long strike at Boeing. After Hurricanes Helen and Milton, there may be continued fluctuations in the number of initial unemployment benefit applicants.

Compared to inflation data that exceeded expectations, the sharp increase in initial unemployment benefit applicants received more attention, so the market increased its bets that the Federal Reserve will cut interest rates by 25 basis points next month. Traders now expect the Federal Reserve to cut interest rates by 46 basis points for the rest of 2024, slightly higher than before the release of economic data on Thursday.

What does the Federal Reserve think?

After the latest inflation and employment data were released, Federal Reserve officials also spoke out.

Atlanta Federal Reserve Chairman Bostic clearly mentioned the possibility of pausing interest rate cuts in November. He is open to not cutting interest rates or only cutting by 25 basis points at the November meeting, depending on the development of the economic outlook. "If the data indicate that it is appropriate to pause interest rate cuts, then I can fully accept skipping the next meeting." Echoing this, in the "dot plot" submitted at the September meeting, he only expected that interest rates would be cut by 25 basis points within the year.

At the same time, Bostic also emphasized that the magnitude of a single interest rate cut is not important, what is more important is the overall interest rate path and terminal interest rate. He believes that the neutral interest rate should be between 3% and 3.5%, and the Federal Reserve will bring interest rates close to this level next year.

Although a minority voice for "pausing interest rate cuts" has emerged, the gradual interest rate cut faction is still the mainstream, and many officials still support a 25 basis point interest rate cut in November.

New York Federal Reserve Chairman Williams said that given that the risks to achieving inflation and employment targets have been better balanced, policymakers should "over time" bring interest rates to a more neutral level. He believes that U.S. inflation is moving towards the 2% target, and the labor market has cooled somewhat over the past year but remains robust, which should provide room for the Federal Reserve to adjust interest rates to a level that "neither puts pressure on the economy nor stimulates the economy."Echoing this sentiment, Chicago Federal Reserve Chairman Goolsbee also stated that over the next year to a year and a half, the Federal Reserve will carry out a series of interest rate cuts. Currently, inflation is close to the 2% target, and the economy is at full employment. The Federal Reserve's goal is to maintain these conditions. However, there may be more meetings like the one in September in the near future, where policymakers assess sometimes contradictory data and then make difficult decisions.