Payrolls Preview: Too Hot Or Too Cold Will Spook Markets

In a week which saw the latest Middle-East war escalate to unprecedented proportions, and a once in a generation port strike start, and seemingly end, it's not hard to see why tomorrow's jobs report may be a bit of a letdown, especially since the Fed has already committed to cutting rates. That's not the only reason why tomorrow's print may be a non-event: according to consensus, 150k nonfarm payrolls will have been added to the US economy in September, a similar pace to August’s 142k. While analyst forecasts range from 70-220k, it is unlikely that we will get an outlier print. The unemployment rate is also seen unchanged at 4.2%, beneath the Fed's year-end median projection of 4.4%. Wages are expected to grow 0.3% M/M, cooling from August’s 0.4% rate, while the annual measure is seen unchanged at 3.8% Y/Y.

Meanwhile, as detailed further below, labor market proxies released in the month have been mixed: weekly jobless claims data that coincides with the BLS survey week saw initial claims fall, while continued claims rose. Challenger layoffs eased slightly while ADP’s measure of private payrolls was above expectations. This was offset by the ISM manufacturing employment component which slipped further into contractionary territory, while the services employment entered contractionary territory for the first time since June. The lagging August JOLTS data was above expectations.

The September jobs data will help shape expectations of Fed easing through the end of this year; Chair Powell this week signaled a further 50bps of rate reductions via two 25bps rate cuts in November and December, a hawkish take compared to what the market is pricing in. This guidance and the hot ADP print has seen money market pricing tilt back towards a 25bps move in November, currently pricing a 64% probability of a 25bp cut in November. Nonetheless, if the data were to show a significant weakening (Fed's Bostic said a sub-100k print would warrant closer questioning), expectations for another 50bps move may become reinvigorated. That said, before the Fed’s meeting, there is still another jobs report due, which will give policymakers more data to assess in their deliberations.