In fact, the new market-friendly policy thrust, galvanized by a U.S. labor market surprisingly better than recession, raises questions of a “no landing.” This term refers to the state in which an economy continues to grow without some significant slowdown into recession, no matter how hard those trying to bring inflation under control try to make it land. This is precisely the opposite direction of once-dominant fears of either a hard or soft economic landing, referring to a recession or the gradual slowdown, respectively.
The U.S. job market remains strong, while the payrolls report for September came in way above expectations at an addition of 254,000 jobs, starkly altering the course of action this will now take within the Federal Reserve. Markets were awaiting a harsh interest rate cut in the near future. But with all of this newfound strength in the labor market, traders are now seeing a slower pace of cuts—even quarter-point cuts at each of the Fed’s next few meetings rather than a bigger 50 basis point cut. This would be in line with the more dovish talk of the Fed’s chairman, Jerome Powell.
Actually, the signals for a “no landing” scenario have fueled a surge of confidence in almost all asset classes. US equities rose, with Dow Jones hitting new highs. The dollar index reported its best week in two years, and oil prices surged. All these added complications to the economic outlook. Markets almost everywhere, especially Asia, revelled in the gains of their brethren—the Japanese Nikkei led the way with its 2% increase.
The economic background has also ratcheted up geopolitical uncertainties, especially in the Middle East, where recent escalations between Israel and Hezbollah only fueled the volatility of markets. Sometimes, such geopolitical risks spur caution, but economic strength seems to override such concerns, at least in the near term. Specifically, the upward momentum of oil prices has opened the door to a potential revival of inflationary pressures that could be a delicate balancing act for central banks.
With this “no landing” scenario unfolding, again, market participants stand divided on how sustainable it might be. Some argue that the labor market’s strength eventually feeds into inflationary pressures, with necessary tighter monetary policies. Others view this as a sign of a sound and robust economy, which will surely survive different global challenges and still sustain growth. This shift in expectations has, for now at least, given markets a temporary lift. Still uncertain, however, is the long-term impact in how central banks will recalibrate their strategies to take into account both strong growth and stubborn inflation.
In short, surprise labor market resilience in the U.S. “no landing” scenario has lifted markets and shifted the outlook on monetary policy. As investors continue to digest these developments, the question on everyone’s mind will be whether the economy can sustain this growth path without reigniting inflation or if the central banks will become more heavy-handed over the months ahead.
