Shen Wan Hongyuan: What is the probability that the Federal Reserve will cut interest rates continuously in January 2026?

The Zhitong Finance App learned that Shen Wan Hongyuan released a research report saying that overall non-farm payrolls in the US declined in October-November, and the unemployment rate rose further to 4.6% in November from 4.4% in September. In the short term, the US unemployment rate “rises and falls”, and demand is a shortcoming, but the job market may gradually “rebalance” in 2026. In the short term, tariff shocks, government shutdowns, and AI will still suppress demand. However, in 2026, the US labor supply may still shrink (expulsions of immigrants increase), demand gradually stabilizes (tariff shocks, government layoffs ease), and break-even employment remains low.

The bank continued, will the probability that the Fed will cut interest rates in January increase? Not necessarily; further observation of the December economic data is needed. The “credibility” of the unemployment rate data is limited. Powell also said at the December meeting that the employment data may be distorted (distorted). Moreover, the US retail performance for October, which was released at the same time as the employment data, may reflect the “resilience” of the start of the holiday shopping season.

Shen Wan Hongyuan's main views are as follows:

The US unemployment rate surpassed expectations and rose to 4.6% in November, one step away from triggering the “Sam's Rule” once again. What are the driving factors behind the rise in the unemployment rate, and what is the probability that the Federal Reserve will cut interest rates continuously in January 2026?

1. Overview: The US non-agricultural ratio was better than expected in November, but the unemployment rate rose to 4.6%

Non-farm payrolls declined overall in the US from October to November, and the unemployment rate rose further to 4.6% in November from 4.4% in September. In terms of institutional surveys, US non-farm payrolls added 64,000 new jobs in November, and a decrease of 105,000 in October. The average hourly wage in November was 0.1% month-on-month, and the market expected 0.3%; in terms of household surveys, the US unemployment rate rose to 4.6% in November, and the labor participation rate rose to 62.5%.

After the data was released, US stocks recovered, gold rose, and the 10Y US bond interest rate and the US dollar index “fell first and then rose”. It's hard to say “fear of recession.” After the US employment data was released in November, the market was less affected by the unemployment rate rising to 4.6%. The 10Y US bond interest rate and the US dollar index both “fell first and then rose”. The overall trend was not greatly affected by employment data; US stocks only rose when the data was released, and then pulled back.

2. Structure: What is the reflection behind the 4.6% unemployment rate? Temporary layoffs and improved labor supply are the main reasons

The government's “deferred resignation” plan led to a decrease in employment in October, and the impact of tariffs and AI was also reflected. Non-farm payrolls in the US fell by 105,000 in October, mainly affected by the government's “deferred resignation” plan; in October-November, employment performance in the private sector industry was “uneven,” and the construction, education and medical industries picked up, but employment performance in the financial and information “white-collar” industries was weak.

The US unemployment rate rose to 4.6% in November, exceeding market expectations, but “trustworthiness” is not high. 1) The tipping point of the unemployment rate that triggered the “Sam Rule” was 4.7%; 2) The rise in the number of unemployed people in November was mainly contributed by temporary layoffs and re-entry into the labor force, which corresponded to the November increase in participation; 3) The US Labor Administration said that the November household survey response rate was only 64%, which is lower than normal.

3. Outlook: Will the probability that the Federal Reserve will cut interest rates in January 2026 increase? Not necessarily, we need to observe the December economic data

In the short term, the US unemployment rate “rises and falls”, and demand is a shortcoming, but the job market may gradually “rebalance” in 2026. In the short term, tariff shocks, government shutdowns, and AI will still suppress demand. However, in 2026, the US labor supply may still shrink (expulsions of immigrants increase), demand gradually stabilizes (tariff shocks, government layoffs ease), and break-even employment remains low.

Has the probability that the Fed will cut interest rates in January increased? Not necessarily; further observation of the December economic data is needed. The “credibility” of the unemployment rate data is limited. Powell also said at the December meeting that the employment data may be distorted (distorted). Moreover, the US retail performance for October, which was released at the same time as the employment data, may reflect the “resilience” of the start of the holiday shopping season.

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