News & Analysis

The September jobs report smashed expectations across the board – and should kill off any prospect of another 50bp cut from the Fed this year.

As we have argued for some time, concerns over the state of the US labour market appeared overblown. This latest set of jobs data confirms our view. Nonfarm payrolls had been expected to print at 150k. It actually landed at 254k, accompanied by a 0.1pp drop in the unemployment rate to 4.1%. In short, this is a labour market that remains healthy, if not a little tight.

Considering this, we continue to look for 25bp cuts in both November and December, and 100bps of cuts in 2025.

Skimming over the details of today’s labour market report, almost every single reading skewed hawkish. Not only did headline prints beat expectations, but the breakdown of job gains also pointed to a broader economic resilience. Looking at the Establishment Survey, job gains were concentrated in food services and drinking places (+69k), while healthcare (+45k), government (+31K), and social assistance (+31k) were also significant risers. It is the first of these that is notable, however, given that sector’s sensitivity to discretionary consumer spending. A stellar month for job gains, therefore, would point to resilient consumer demand that should continue to support economic growth.

Not only would this suggest that downside concerns have been overstated, but also that upside risks to inflation are not entirely dead and buried.

The Household Survey data tells a similar story too. Specifically, average hourly earnings grew by 0.4% MoM in September, beating expectations for a 0.3% print. Granted, this was marginally down on an August reading that was itself revised up to 0.5% MoM. But this was still sufficient to see annual average earnings growth rise to 4.0% YoY. We had warned that last month’s 3.8% print would be uncomfortable for some on the FOMC. Considering this, we think today’s number should be setting off alarm bells. This is a pace of wage growth inconsistent with the Fed’s 2% inflation target.  Combined with a broad improvement in other labour market readings, it points to growing risks of a pickup in inflation pressures if the FOMC eases rates too rapidly.

Perhaps unsurprisingly, OIS pricing now shows that traders have almost eliminated any chance of a jumbo 50bp rate cut before year-end.

This leaves markets largely aligned with our call for two 25bp cuts before Christmas. That said, we think next year’s market implied rate projections remain too aggressive, relative to both our own expectations and the Fed’s dot plot. As such, we suspect there is scope for further dollar upside, despite the DXY index posting a 0.6% rally immediately following today’s publication.

Markets have now largely priced out any risk of another 50bp cut this year, with only 2 full rate cuts now expected before Christmas, helping the dollar to take another leg higher

 

 

Author: 
Nick Rees, Senior FX Market Analyst

 

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