Post NFP Takeaways: Econ, Rates, FX

PodcastGlobal Research UnlockedShruti MisraOct 5

The September jobs report showed slower hiring and wage growth, but the speakers saw little evidence of a broad increase in job losses and said the report did not materially change the Fed's labor-market assessment. They viewed inflation—especially the upcoming CPI report and underlying core PCE trend—as more consequential for the Fed's path. Markets priced October hike odds near 20%, while dollar moves were modest; the team's near-term rates outlook remained higher despite the potential for short covering and a rally on supportive data.

Labor Market Inflation Monetary Policy

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Key Takeaways

September private payroll growth came in at 46,000, below the 50,000 consensus, with weaker hiring in leisure and hospitality and local government; however, the speaker viewed the 4.2% unemployment rate as benign, citing a 406,000 increase in household employment and little evidence of a broad pickup in job losses. Wage growth slowed from 0.3% to 0.1% month over month, which the speaker said was not an inflationary source.

The speakers said the upcoming CPI report mattered more than the jobs data for the dollar and the Fed’s path, and that a hot reading could quickly overshadow the labor report. One speaker maintained the team’s October hike call based on September CPI and the need for decisive action, while acknowledging that the risks had shifted toward no hike; market pricing for an October hike had fallen to around 20%.

One speaker argued that underlying core PCE inflation was running at 2.5% year over year, with little evidence of improvement over 12 months, and said that trend mattered more for policy than headline or core PCE levels. Although BEA revisions lowered some recent inflation readings, the speaker said they did little to change the underlying assessment; a Taylor-implied calculation using 4.2% unemployment and 3% spot core PCE put the peak federal funds rate at 4.7%, near market pricing.

ECONOMY

Payroll Growth — September private payrolls grew by 46,000, versus 50,000 expected. The speaker attributed some weakness to seasonal factors and a four-week survey calendar. The three-month average for headline and private job growth remained around 50,000, above breakeven.

“We were expecting private jobs to come in much softer than August at 50,000, and they came in at 46 k, so not a lot of surprise there.”—

Sector Hiring — Hiring slowed in leisure and hospitality, where job growth fell to 10,000 from 37,000 in August. Local government lost 13,000 jobs. Education and health services continued adding about 20,000 jobs, slower than their pace over the prior year.

“Leisure and hospitality slowed down to 10,000 versus 37,000 in August…”—

Unemployment Rate — The speaker characterized the rise in unemployment to 4.2% as benign, noting that the unrounded rate edged up from 4.14% to 4.17%. Household employment increased by 406,000, while U2 fell from 1.91% to 1.88%. The speaker saw little sign of a broad pickup in job losses.

“Now more importantly, shifting gears to the household survey, the unemployment rate rose to 4.2, but with a very benign move. It just moved on an unrounded basis from 4…”—

MARKETS

October Hike Odds — Market pricing for an October Fed hike had fallen to around 20%. The speaker said further changes in that probability depended on incoming inflation data.

“But market pricing for October has come down. We're looking at around 20% or so currently…”—

Dollar Softness — After the data, the dollar weakened broadly but modestly, with moves generally below a quarter of a percent across G10 currencies. The largest moves were against higher-beta currencies as equities opened higher.

“So look, FX reaction was a bit of a broad dollar softness I'd say post data. Directionally that's not at all surprising…”—

CTA Short Covering — The speaker said CTAs were quite short and estimated that a roughly 10-basis-point rally in two-year rates would prompt more front-end short covering. At the time, the two-year move was only 2 basis points, short of that potential inflection point.

“And they were flagging last night that about a 10 basis point or so rally in twos from last night would generate more short covering at the front end of…”—

FORECASTS

Yield Threshold — Historical analysis indicated that pressure on equity P/E multiples appears when 10-year yields reach 7%. The speaker said this was not the team's base-case expectation.

“Our equities team has done some really interesting analysis on this, looking historically at when we see more pressure on PE multiples…”—

September Payrolls Report

The economists describe slower hiring and wage growth but say seasonal effects explain some weakness, while household-survey details show little sign of a broad rise in job losses.

Labor Market Stability

Despite a small uptick in unemployment and weak wage growth, the speakers see a stable labor market, with low hiring offset by low firing and job growth above breakeven.

October Fed Hike Outlook

The jobs report did not materially change the Fed’s labor-market assessment, and the team retains its October hike call while acknowledging that the risks have shifted toward no hike.

Underlying PCE Inflation

Methodological revisions lowered measured core PCE, but the team says underlying inflation remains near 2.5% and upside risks from demand, energy, and investment persist.

Treasury Rates Outlook

Markets lowered October hike odds to around 20%, but the rates team sees the path of least resistance higher as financial conditions have not tightened enough.

Dollar Reaction to Payrolls

The dollar softened modestly after payrolls, but the speakers view the report as no game changer and expect CPI to matter more for the dollar and Fed expectations.

Rates and FX Positioning

Rates investors remain short duration and overweight spread products, while dollar sentiment has improved but is not yet exuberant and remains tied closely to rate differentials.