Wall Street Frontline｜Paul Gruenwald: U.S. Labor Market Strength Could Slow Fed's Rate Cuts

According to data released by the Department of Labor on Friday, the U.S. nonfarm payrolls surged by 254,000 in September, significantly surpassing the expected 132,500 and the revised 159,000 in August (previously reported as 142,000). The strong job growth pushed the unemployment rate down to 4.1% from 4.2% in August, beating market expectations of 4.2%. The September report highlights the ongoing resilience of the labor market.

Following a 50 basis point rate cut by the U.S. Federal Reserve in mid-September, a global wave of monetary easing is now in motion, with many central banks, especially in emerging markets, following suit. While the global economy has shown greater resilience than expected, significant regional disparities remain. The U.S. economy is gradually slowing down, the eurozone is experiencing a modest recovery, and China has introduced a range of new policies to address its economic landscape. However, global growth remains sluggish, and looming risks such as labor market pressures and geopolitical uncertainties continue to pose significant challenges.

Today, we have the opportunity to dive deeper into these issues with Paul Gruenwald, Global Chief Economist at S&P Global, who will share his insights on whether this smooth economic trajectory can last.

Wall Street Frontline：The nonfarm payrolls surged by 254,000 in September, which is significantly surpassing the expectations. So, how will this affect the Federal Reserve's monetary decisions in November as well as in December?

Paul Gruenwald: Yeah, well, it was a big surprise. I think we were all expecting a lower number. But this trend we've seen of very strong labor demand has been going on for a couple of years. The Fed said very clearly that it's moving away from its inflation mandate and now is focusing more on the labor market. But this signals that the Fed probably needs to go more gradually. We have all 25 basis point cuts for this entire cycle after the 50. I know some on the street were more aggressive. But if anything, this underscores the case that the Fed's going to go slowly until the next labor market report. Maybe it's not going to be smooth, maybe.

Wall Street Frontline：So, you think by 2024, there will be a total of 100 BPs cut?

Paul Gruenwald: We have two more 25s this year. Right.

Wall Street Frontline：Speaking of the inflation with sequential inflation measures now approaching the central bank's target, how do you see inflation trends evolving in 2025 and beyond? So, what implication will this have on monetary policy across major economies?

 Paul Gruenwald: Okay. Well, even if the Fed does cut 100 basis points this year, which is our baseline, monetary conditions are still restrictive, more restrictive than neutral. So, that means the economy is going to slow. So, we would expect sequential inflation to continue to slow. The Fed's targeting two. We're kind of two to two and a half right now on sequential inflation. So, it's not necessarily going to be a straight line. But we think the trend is going to be for gradually lower inflation. The Fed's going to take its foot off the brake and move toward neutral. So, that's kind of the path for 2025 that we're looking for.

Wall Street Frontline：So, how do you foresee the current global rate cuts affecting emerging markets, especially in terms of like capital flows and debt levels?

 Paul Gruenwald: Well, you're right. A lot of emerging markets pay very close attention to the Fed. They're looking at growth differentials with the U.S. and they're looking at interest rate differentials. So, as long as the Fed stays relatively high, emerging markets can't cut very aggressively because if they get too far below the Fed, the risk is that there's going to be capital outflows. Asia in particular, I think Asian central banks are more sensitive to this than, say, Latin America. But now that the Fed has started moving, we got the surprise 50 last month and we're going to probably get a few more. That gives emerging markets a little more space. So, as growth slows down, we think we're going to see more moves from emerging markets.

Wall Street Frontline：Are there any specific regions where you see like greater potential for growth?

Paul Gruenwald: Well, we're not in a great growth environment right now, but the U.S. is the outperforming economy. So, countries that have a stronger link to the U.S. are probably in a better position. Countries that have a stronger link to Europe are probably weaker because European growth is less than 1% this year. And the last one is whether you have a strong domestic market. So, if you're in Brazil or in Indonesia, India, you've got a big domestic market, you can grow faster or you're plugged into the U.S. or you're plugged into tech. Everyone else, I think, is going to struggle.

Wall Street Frontline：At the beginning of this year, you mentioned that right now Europe is on the edge of economic recession because their economic growth rate is around like 1%. Do you still hold the same view?

Paul Gruenwald: Yeah. Europe already hit the bottom. So, they had a manufacturing recession. It was centered in Germany. That's where most of the manufacturing is. Manufacturing is more sensitive to interest rates. Europe's already kind of hit the bottom and now we're starting a very slow recovery. The big economies that are services-led, such as Spain and Italy, are pretty good. But we think Europe has already hit the bottom and is going to slowly climb back to kind of 1%, 1.5% next year.

Wall Street Frontline：In 2025, what regions do you see the most risk?

Paul Gruenwald: The risks are actually recession in the U.S. if the bottom falls out of the labor market. Or we get a spike in bond yields. We have a large U.S. deficit, but the markets have been very sanguine about buying U.S. debt. So, if either one of those happens, again, it's probably the open emerging markets who are most at risk. If we get a big spike in volatility, there's a flight to quality. People go into the U.S. dollar, the U.S. treasury. Funding dries up to emerging markets. That's the typical scenario for a macro or a credit shock. So, if we go down that scenario, which is not our baseline, if we go down that scenario, it would probably be kind of the more open, exposed, dollar-dependent emerging markets that would be most at risk. You just mentioned the U.S. labor market, because right now all eyes are on the labor market.

Wall Street Frontline：And it's kind of like a bumpy road, because the labor market experienced some downward trend, and then right now it's suddenly a surprise for the nonfarm payrolls. Do you think this will be sustainable?

Paul Gruenwald: Well, that's a big question, right? We've been very surprised at the strength of the U.S. labor market. But if you look at headline growth, the second quarter, we have the final numbers was 3%. The preliminary numbers, the GDP now for the third quarter is close to 3%. The U.S. is a 2% economy. So, if growth is trending close to 3%, you would expect a strong labor market. We are eventually expecting the U.S. to slow below 2%, take out some of the extra inflation pressure. But we keep pushing out that forecast because we keep getting surprised at the strength of the labor market.

Wall Street Frontline：I just read your most recent economic outlook. And in that economic outlook, you've revised the global growth forecast downward slightly. So, what are the main factors behind this downward trend adjustment?

 Paul Gruenwald: Yeah, we didn't move it very much. But this year, it was Japan and a couple of emerging markets. Next year, we lowered China a bit. But these aren't big. These aren't big changes. They're like 0.1%, 0.2%. I think we're in this kind of slowish track. We're in kind of a 3%, maybe a little bit more than 3% global growth path right now. But again, this configuration of strong U.S., a little bit weaker Europe, struggling China, EMs are mixed. That's the pattern we've seen for a while.

Wall Street Frontline：Speaking of China, in late September, China just launched its biggest economic monetary stimulus since pandemic. And the stock market has been reacting very, very positively. So, what is your viewpoint on China's stimulus plan?

Paul Gruenwald: Well, first of all, this was welcome, right? We've been talking for a long time about the weakness in the property market. So, rather than doing a small 10 basis point move, this was 50 basis points on the reserve requirements, 50 basis points on mortgage interest rates, lowering down payment for second homes. Even people know the Politburo was discussing this, so it was at the highest level of the government. This helped confidence and the stock market kind of took off. The Chinese stock market may not be the best indicator of the economy, but I think overall, it's positive. 

Wall Street Frontline：So, right now, the condition kind of improved. So, why do you think the stock market does not really reflect China's economy?

Paul Gruenwald:  It's just not very deep. I mean, we're here at the New York Stock Exchange. The U.S. is very deep, very broad capital markets. China is a lot skinnier. It's very retail, so it's a little more volatile.  I don't think we would base a big revision in the growth forecast only on the stock market. We'd look at more of the fundamentals.