The Daily Update - Payroll Pessimism

Following on from the weak economic data this week focus will be on the Non-Farm Payrolls (NFP) data this afternoon. Ahead of the data the market is pricing in an 86.3% chance of a further rate cut of 25bps at the Fed’s October 30 meeting. To be clear, weakness in the employment sector is now a prime focus following the recent ISM data, which showed a sharp drop in small business hiring and the worst services sector employment in five or nine years depending on which measure you concentrate on.

Last year the economy added 2.7 million jobs but this year expectations are for around 1.9 million which would be the lowest yearly gain since 2010. Heading into the releases the market expects a gain of just 130k in private payrolls; the weakest in seven years apart from months heavily affected by storms or shutdowns. There is a chance that the headline number could be higher than the calls due to temporary census hiring during the month.

Broadly, over the past few months, the market has wondered just how weak the NFP release has to be for the Fed to cut, but this time round the question seems to be how strong the data has to be for the Fed not to cut.

Drum roll……

NFP for September was 136k with a two-month adjustment of +45k so overall a strong headline, with just 1k added for the census, however, average earnings were flat which equates to 2.9% year on year, much lower than the 3.2% expected. Private employment came in at 114k, again weaker while the unemployment rate dropped again to 3.5% from 3.7%.

Broadly a mixed report but the inflation picture continues to be a positive for the longer end of the yield curve. Prices are not moving much on this and the expectations for a further cut in October have fallen to 80.6%. We are still data-dependent at the Fed.

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