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Morgan Stanley has revised its Federal Reserve interest rate forecast, no longer expecting a rate cut in December following stronger-than-anticipated employment data.
The investment bank cited the "sharp and broad rebound in payrolls (+119k)" as evidence that "the summertime slowdown might have been exaggerated." While the unemployment rate increased by 0.1 percentage point to 4.4%, Morgan Stanley noted that the strength in payrolls suggests stabilization in the labor market.
The three-month average of job gains reaccelerated to +62,000 from +18,000, despite small downward revisions to prior months that pushed August into negative territory. The bank observed broad-based employment gains across both goods and services sectors.
Morgan Stanley pointed out mixed signals from unemployment data, with the rate rising to 4.44% (nearly 4.5%), but attributed this increase to higher labor force participation rather than layoffs. The firm noted that without the change in labor force participation rate, the unemployment rate would have fallen.
The bank now forecasts Federal Reserve rate cuts in January, April, and June, maintaining its previous terminal rate projection of 3-3.25%. With the S&P 500 currently trading at a P/E ratio of 16.49 and offering a dividend yield of 1.11%.
