US Payrolls surge in September, as 50bp rate cut ruled out

US payrolls data surprised on the upside in September, rising by 254k, smashing expectations of a 150k rise. The unemployment rate fell to 4.1% from 4.2%, average hourly earnings increased to a 4% YoY rate and there was a 72k upwards revision to the previous two months’ payrolls numbers. This is a monster report that should give the Fed pause for thought when it comes to their next interest rate decision.  

Report supports a strong US economy

The detail of this report is worth noting. The monthly rise of 254k is significantly higher than the average monthly gain for the last 12 months, which is 203k. There were strong gains in employment for hospitality, healthcare, government, social care and in construction. Other sectors including oil and gas, mining, education and professional services saw little change in jobs last month. Thus, there is little sign of any weakness in the US labour market at the end of Q3.

Overall, this supports the Fed’s decision to cut interest rates by 50bps last month, as it is evidence of a soft economic landing for the US economy.  However, it clouds the future outlook for Fed rate cuts.

The market reaction

Immediately after this release, US Treasury yields have spiked higher, the 2-year Treasury yield is higher by 15bps. We have mentioned that on average over the last 12 months, the S&P 500 has reacted moderately positively to the NFP report. S&P 500 futures are pointing to a stronger open for US shares after a bruising week. The dollar has also spiked higher in the aftermath of this report, and it is stronger on a broad basis. GBP/USD has taken another hit after being in the firing line all week. GBP/USD fell below $1.31 immediately after the monster payrolls report. It is currently finding its feet around $1.31. Today’s data cements a bad week for the pound, it is one of the weakest currencies in the G10 FX space since the start of Q4 and it is Iower by nearly 2% vs. the USD so far this week, which is a huge move in FX terms. Gold is also sliding on this report, as it suggests that US recession risks are falling, and gold is currently trading around $2,640.

What next for the Fed?

The interest rate futures market had a large reaction to the NFP report, as expected, and we have seen expectations for a 50bp rate cut from the Fed scaled back further. Currently there is a 12% chance of a 50bp rate cut, a week ago this was nearly 60%.

The market still expects a 25bp cut, and there are still 74bps of rate cuts expected by the Fed by year end, which should be supportive of stocks and risk sentiment. However, the market has reduced the number of rate cuts that it expects from the Fed in the next 12 months. There are now just over 6 cuts expected, at one point there were more than 10 cuts expected. The yield curve has also steepened sharply, the 10-year - 2-year Treasury yield curve has steepened sharply. This is a sign that the bond market is positive about the outlook for the US economy. CPI is released next week, and it is expected to moderate towards the Fed’s 2% target rate. A strong employment situation in the US, coupled with moderating inflation is a goldilocks scenario for the US economy as we move towards Q4, and we think that this should be positive for equities, which have been hamstrung in recent days due to elevated levels of geopolitical risk aversion.

Overall, this payrolls report suggests that the US economy is strong, and at 254k, payrolls growth is at its highest level since March.