NFP Recap: Weaker US Jobs Data Places December Rate Hike in Focus

156,000 non-farm jobs were added to the US economy in September, moderately disappointing forecasts of around 170,000-175,000. The US unemployment rate was also slightly worse than expected, ticking up to 5.0% against expectations of 4.9%. The increase in average hourly earnings remained constant at 0.2%, as expected. Alongside the headline disappointment, a somewhat brighter spot in the report saw an upward revision of August’s job creation from the previous 151,000 up to a revised 167,000.

Although one Federal Reserve official, Cleveland Fed President Loretta Mester, stated shortly after Friday’s employment release that the report was “solid,” September’s numbers were undoubtedly weaker than the markets had anticipated, upsetting expectations of a potentially sooner interest rate hike from the Fed.

Despite this disappointment in employment data, the market’s assessment of a December Fed rate hike has not been substantially affected. In fact, according to Fed Fund futures implied probabilities, the likelihood of a December rate hike even rose moderately from just over 60% to around 70%. After all, there are two more major jobs reports and a slew of other key economic data to be digested before December’s Fed meeting.

However, Friday’s weaker non-farm payrolls report has very likely precluded the already slim chances of a November rate hike, with the implied probability falling from 15% down to around 10% or lower after the jobs release. This is especially the case because a major risk event – the US presidential election – occurs only six days after the November Fed meeting. Had the jobs report come out much better than expected, the probability of a November hike could have risen significantly higher, even in light of the upcoming election.

After the employment report was released, the market reaction was mixed and somewhat muted, given that the data disappointment was not overwhelming. The US dollar pulled back on the news, as might have been expected, while equity markets and previously plunging gold prices received a modest initial boost due to the nearly-nil likelihood of an immediate Fed rate hike. These dynamics changed somewhat, however, as the markets digested the numbers and focus returned back to the high and increasing likelihood of a December hike. As such, further into Friday morning, the US dollar stabilized as gold pared its short-lived gains and stock markets slipped once again.

With several Fed speakers to speak on Friday post-NFP, more hawkish talk despite the worse-than-expected jobs data could raise the probabilities of a December rate hike even further, which could still weigh on gold and equities while providing continued support for the dollar.