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NFP- Headline miss but supporting data beats

Market Analysis

EURUSD, H4              

US nonfarm payrolls increased 156k in September following August’s upwardly revised 167k gain (was 151k), though July’s 275k jump was revised down to 252k. The unemployment rate popped up to 5.0% from 4.9% previously. Household employment rose 354k from 97k, while the labor force surged 444k from 176k. The labor force participation rate inched up to 62.9% from 62.8%. Average hourly earnings rose 0.2% versus 0.1% in August. The workweek improved to 34.4 hours from 34.3 hours. Total private payrolls climbed 167k from 144k in August (revised from 126k), and versus the 154k ADP September gain. The goods sector added 10k jobs, with construction up 23k, while manufacturing shed 13k. Service sector jobs rose 157k, paced by a 67k increase in business services employment. Government jobs fell 11k. The data mix seems good enough for a Fed rate hike by year end, and that should keep bonds and stocks nervous, and underpin a firmer dollar.

Cleveland Fed hawk Mester said 156k is a solid labor market report, and reiterated all FOMC policy meetings are live in a CNBC interview. She noted today’s jobs number is about double what’s needed to keep the unemployment rate stable. Indeed, she does believe the economy is at full employment and has met its dual mandate, and those factors support her call for a rate hike. The Fed has to be forward looking too, and policymakers go into meetings on apolitical footing, she stressed. The economy has proven to be quite resilient to the various headwinds, while inflation has started to move up toward the 2% goal, so it makes sense for the Fed to raise rates. She doesn’t believe the Fed is doing harm by keeping rates near zero. Remember that Mester is one of the five voting presidents, and was one of the three dissenters (along with George and Rosengren) at the September FOMC.

Fed funds futures are modestly higher after rebounding from early losses. There wasn’t clear direction from the jobs report, but shorts are covering after taking out some insurance against a strong jobs number that would have all but “guaranteed” a rate hike and might have upped the risk for a November tightening. Despite the bounce in futures, implied rates are still suggesting nearly a 65% chance for the FOMC to pull the trigger at the December 13, 14 policy meeting. Action as soon as the November 1, 2 meeting seems unlikely after today’s data, and with potential instability in the money markets after the new reforms go into effect on October 14. And even though Fed officials claim they are apolitical, it’s unlikely they would think tightening rates a week before the presidential election on November 8 would be a good idea.


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Stuart Cowell

Market Analyst


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