Soft September payrolls should take October off the table
An October rate hike now looks unlikely after September’s jobs report printed soft across the board.
Headline payrolls rose by just 29k last month, against a consensus of 90k and our own below-consensus 60-80k estimate, while August's blowout was revised down by 29k to 133k. The unemployment rate ticked up from 4.1% to 4.2%, and average hourly earnings rose only 0.1% MoM, dragging the annual rate down to 3.0%, a tenth below expectations. In light of today’s release, we are revising our Fed call.
We now expect another hike only in December, though we continue to see swap pricing as much too hawkish in 2027.
Still, despite the soft headline readings, this is not a labour market rolling over yet. We had anticipated some headline pullback relative to August, with an unwind in last month’s boost to local education pencilled in, and with employment in leisure and hospitality having benefitted from a favourable season adjustment. Indeed, we would note that the rise in unemployment came alongside a 0.2pp jump in participation to 61.8%, while at 4.2%, the jobless rate merely returns to its June level. In addition, average weekly hours held at 34.4, a tenth above expectations, while claims at 197k, ADP at 90k, and subdued Challenger layoffs all point to the same low-hire, low-fire equilibrium that has defined 2026.
Averaging August and September, an underlying trend of roughly 80k remains close to breakeven given weak labour supply growth.
As such, we think today’s data warrants some caution, but not acute concern for the FOMC. This has broadly been the tone of Fedspeak over recent days anyway, with most Committee members arguing that there was no urgency to move again this month, taking October hike pricing from around 70% to roughly 25% before today's release. A sub-50k print with rising unemployment and cooling wages hands that patient camp exactly what it needed, particularly with midterm elections on November 3rd falling less than a week after the October 28th decision.
We are therefore pushing our call for the next 25bp move to December, assuming the FOMC will follow through with one final 2026 hike, in line with last month’s SEPs.
For the dollar, the knee-jerk reaction has been to hand back some of the week's gains, with the DXY retreating from Thursday's high above 102. Even so, we expect the pullback to prove shallow. Long-end yields have been driven higher by fiscal worries and oil rather than Fed pricing in recent days, with the 10-year touching 5.34% on Thursday. Meanwhile, the greenback's haven status remains intact with US-Iran talks unresolved and Brent hovering around $100. That mix is likely to continue favouring the dollar at the margin, offsetting the post-release pullback in Fed tightening expectations.
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