Nonfarm payrolls clear the bar for the Fed
October’s jobs report has delivered the upside surprise we had been looking for, seeing Nonfarm payrolls rise 165k, above all economist estimates, even as upward revisions to the prior two months added a further 84k, lifting September’s initial 29k gain to 60k.
The unemployment rate slipped to 4.1% against expectations for an unchanged 4.2% print, despite participation rising to 61.9%. Meanwhile, average hourly earnings climbed 0.4% last month, taking annual wage growth to 3.1% when consensus had looked for a slowdown to 2.9%.
We argued last week that the bar to derail a December hike was high, and this report clears it with room to spare.
Moreover, not only were headline numbers strong, but the detail of today’s release is also firm. Gains were led by professional and business services (+70k), health care (+42k), transportation and warehousing (+25k), and manufacturing (+19k), while the diffusion index rose to 57.6, signalling broad-based hiring. Today’s figures leave the three-month average payrolls gain at 137k, more than double the 40-60k breakeven pace implied by tighter immigration. This, we think, clearly vindicates Chair Warsh’s description of the employment side of the mandate as “quite positive” and strengthens the hand of Cook and Hammack, who dissented in favour of a hike last month.
Barring a major downside surprise in Tuesday’s October CPI release, or in the November jobs report on December 4th, we expect a 25bp hike to be near fully priced by the time the Committee meets next month, having risen from around 70% ahead of today’s release, to stand around 80% now.
Two-year Treasury yields have already jumped around 6bp to above 4.5%, and the dollar has rallied across the board. Coupled with a haven-bid on yesterday’s AI fallout, the DXY is now up around 0.7% today, finishing the week on firmer footing after a post-midterms wobble.