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Investing.com - Morgan Stanley has revised its Federal Reserve interest rate forecast, no longer expecting a rate cut in December following stronger-than-anticipated employment data. This shift comes as the S&P 500 (SPY) continues trading near its 52-week high of $689.70, with a year-to-date return of 14.05%, according to InvestingPro 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%, investors using InvestingPro can access additional insights on how these potential rate cuts might impact market valuations. InvestingPro offers 7 more exclusive tips on SPY’s outlook amid changing monetary policy.
In other recent news, Wells Fargo anticipates that the Federal Reserve will implement a 25 basis point interest rate cut at the upcoming Federal Open Market Committee meeting on October 29. This aligns with Wells Fargo’s forecast for two additional rate cuts before the end of 2025, despite the ongoing government shutdown. Similarly, ING expects the Federal Reserve to cut interest rates at its next meeting, followed by another reduction in December. Meanwhile, Goldman Sachs has dismissed concerns regarding the sustainability of artificial intelligence investment levels. The investment bank highlights that AI applications are yielding productivity improvements, necessitating substantial computational power. In the geopolitical sphere, President Trump commented on the trade tensions with China, emphasizing the complex relationship between the two nations. He noted that interactions with President Xi could become "testy" due to China’s approach to international relations.
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