The New York Fed Services Index hits a four-year low! Even in the absence of non-farm payrolls and CPI, interest rate cut expectations are still rising

According to the latest economic data released, service sector activity in the New York area has contracted at the fastest pace in over four years, reflecting a greater decline in U.S. business activity and corporate employment numbers. Following the unexpectedly weak composite data on service sector activity from the New York Federal Reserve, expectations for interest rate cuts by the Federal Reserve in October and December surged in the interest rate futures market, with nearly 100% pricing in two consecutive 25 basis point cuts after the 25 basis point cut in September, totaling a 50 basis point reduction, and betting on at least three more cuts in 2026—higher than the two cuts anticipated before the New York Fed data was released.

As the U.S. non-farm labor employment data and inflation data are delayed due to the federal government shutdown, the New York Fed's service sector business activity statistics are crucial for investors to gain insights into the U.S. economy and market expectations for Federal Reserve rate cuts. The economic output of the New York area is vital for U.S. GDP, thus the service sector business activity in this region can provide a glimpse into the U.S. labor market and the overall U.S. economy.

The service/manufacturing survey data from the New York Fed is extremely important for investors during the "data blackout" period across the U.S. (for example, the federal government shutdown has significantly delayed non-farm, CPI, and retail sales data). Its high frequency and economic leading attributes can fully cover regions of considerable economic size and strong financial characteristics in the U.S.

The worst reading since 2021

The Federal Reserve Bank of New York released the composite index for service sector business activity in October on Thursday, which measures business activity across New York State and most of New Jersey and Connecticut, falling 4.2 points to negative 23.6, shrinking at the fastest pace in over four years. A reading below zero indicates that business activity continues to contract.

This service sector business activity statistic from the New York Fed also marks the worst reading since January 2021, when the overall service sector in the U.S. was still struggling to recover from the COVID-19 pandemic. One of the employment indicators has contracted for two consecutive months, and the outlook on the U.S. business environment continues to deteriorate.

The survey, along with the manufacturing statistics released earlier this week by the New York Fed, highlights the challenging business environment this year amid drastic changes in Trump administration policies. Companies are struggling to control costs associated with higher import tariffs while also adapting to the persistent uncertainty in U.S. economic and fiscal policies and the tight labor situation under immigration restrictions.

Despite companies reporting accelerated increases in input costs, reaching one of the highest levels since early 2023, the growth in service prices is slowing. The report also indicates that while service providers' outlook for U.S. service sector business activity over the next six months is not as extremely pessimistic as it was in early April, it remains generally bleak.

"Businesses do not generally expect conditions to improve significantly in the coming months," said Richard Deitz, an economic research advisor from the New York Fed, in a statement.

The survey conducted by the New York Fed was collected from October 2 to 9.

Manufacturing statistics released by the Philadelphia Fed on Thursday showed that manufacturing activity covering Delaware and parts of New Jersey and Pennsylvania fell to a six-month low in October However, the details of the report are more mixed.

The new orders index rose to a three-month high, while about half of manufacturing plants reported significant increases in input prices. The factory price index also accelerated.

Companies surveyed by the Philadelphia Fed expressed the highest level of optimism about the next six months since April. However, compared to 2024, fewer manufacturing plants expect to increase capital expenditures in the coming year.

The slowdown in the U.S. labor market has become a consensus

It is worth noting that while the U.S. economy and the non-farm labor market have shifted to a lower growth phase, this has become a market consensus, but the U.S. economy and non-farm data have not yet entered a prolonged negative growth phase.

Whether from ADP or Revelio employment statistics, both show that U.S. corporate hiring activities have slowed down. However, both these statistical agencies and major Wall Street firms like Goldman Sachs still expect the U.S. economy to achieve a "Goldilocks-style soft landing."

The recent combination of rising consumer spending, PCE data meeting expected curves, and upward revisions to GDP data, along with recent initial jobless claims showing that the labor market has not significantly deteriorated further, combined with the market's increasing expectations for the Federal Reserve to cut interest rates three times in a row, indeed raises the subjective probability of the "Goldilocks" macro scenario: that is, growth is not weak, inflation is not overheating, and market expectations are more "biased towards rate cuts" on a low-interest rate trajectory.

The so-called "Goldilocks" (Goldilocks) U.S. macroeconomic environment refers to the U.S. economy being neither too cold nor too hot, just right, maintaining moderate growth in GDP and consumer spending along with a long-term stable moderate inflation trend, while the benchmark interest rate is on a downward trajectory.

These data are generally consistent with the "low hiring, low layoffs" state of the U.S. labor market seen before the government statistics "turned off." If this situation persists until the end of this month, it is likely to be sufficient to prompt the Federal Reserve to cut interest rates again—this is also the general expectation among investors, who continue to bet that the Federal Reserve will announce rate cuts consecutively in October and December.

At the same time, several officials have released dovish signals, and high-frequency data such as the sharp decline in the New York Fed's service sector and the continued sluggishness of the Philadelphia Fed's manufacturing index are also adding weight to a more accommodative path.

For the recently strong U.S. short-term government bonds, as well as the record highs in U.S. stocks and even the global stock investment market, whether this expectation for the Federal Reserve's rate-cutting path can continue to heat up or maintain a hot trend will largely determine whether the recent bullish momentum in stocks and bonds can continue on a "bull market bullish trajectory."