The probability of interest rate cuts has risen to 99.4%! Wall Street bets on two rate cuts by the Federal Reserve within the year, and the easing cycle is about to begin.

According to the latest data from CME's "FedWatch", the probability of the Federal Reserve cutting interest rates by 25 basis points at the October monetary policy meeting has risen to 99.4%, while the probability of keeping rates unchanged is only 0.6%. Additionally, the market's expectations for the Federal Reserve's monetary policy path before the end of the year are more aggressive: the probability of keeping rates unchanged in December is only 0.1%, the probability of a cumulative rate cut of 25 basis points is 11.0%, and the probability of a cumulative rate cut of 50 basis points is as high as 89.0%.

📉 Driving factors: Cooling job market and government shutdown

The market's expectation for the Federal Reserve to accelerate interest rate cuts mainly stems from two factors:

1. Employment data shows significant weakness: The US ADP employment number unexpectedly decreased by 32,000 in September, far below the market expectation of an increase of 50,000, marking the largest single-month decline since March 2023. After annual benchmark adjustment, the number of employed decreased by 43,000 compared to before adjustment, indicating a clear slowdown in the hiring momentum in the labor market.

2. Government Shutdown Intensifies Data Vacuum: The U.S. federal government has entered a shutdown for the first time since late 2018 to early 2019, leading to a complete suspension of data releases from key agencies such as the Bureau of Labor Statistics and the Bureau of Economic Analysis. The non-farm payroll report for September, originally scheduled for release in early October, will not be published as planned, highlighting the importance of ADP data and amplifying market concerns about the economic outlook.

💹 Market Impact and Asset Performance

Weak employment data and soaring expectations for interest rate cuts have directly impacted global asset prices:

• Dollar under pressure: The dollar index fell sharply, dropping from around 97.8 before the data release to around 97.5.

• Safe-haven assets supported: Gold prices surged in the short term during the session, as market concerns triggered by the U.S. government shutdown bolstered the safe-haven demand for gold. Cryptocurrencies, as alternative safe-haven assets, may also gain support as a result.

• Increased volatility in US stocks: The three major US stock indices opened lower collectively, with most large tech stocks declining. Market risk aversion sentiment has risen, and the VIX fear index surged over 3%.

🔮 Policy Outlook and Risk Warning

Despite the market almost fully pricing in a rate cut in October, there remains uncertainty about the Federal Reserve's future policy path:

• Data dependency model: The Federal Reserve's decisions will still heavily rely on economic data. If subsequent inflation data rebounds unexpectedly or if the job market shows unexpected improvement, it may disrupt the current rate cut pace.

• Political Pressure and Independence: The Trump administration continues to pressure the Federal Reserve to adopt a more accommodative monetary policy. The change in the Federal Reserve Chair (candidates include Waller, Haskett, and Walsh) may also influence the direction of monetary policy after 2026, bringing uncertainty.

Conclusion: The market almost unanimously expects the Federal Reserve to cut interest rates by 25 basis points in October, with extremely high expectations for a total reduction of 50 basis points by the end of the year. This expectation is primarily driven by unexpectedly weak employment data and the uncertainty brought about by the government shutdown. Investors need to closely monitor the latest statements from Federal Reserve officials and the release of other economic data to seize the opportunities and challenges that come with the policy shift.