Fed "stuck in a tough spot" as unemployment rises unexpectedly

The Fed can probably take its foot off the gas at its December meeting after the release of today’s dated, but no less critical nonfarm payrolls data. Job creation rebounded solidly in September, lifting the 3-month average back above the estimated breakeven employment level. There was also an unexpected uptick in unemployment, albeit to levels that shouldn’t cause too much alarm.

We think that the Fed is stuck in a tough spot. While the jobs market remains rather fragile, sticky inflation and the lack of a clear read on the current state of the economy due to the federal closure means that officials may exert a degree of caution next month. A December cut is not off the table, but we are favouring a hold as the FOMC awaits further delayed data for greater clarity on economic conditions. Market pricing now aligns closely with this view, with futures only pricing in around a one-in-three shot a final cut before year-end.