Rapid Response - Jobs data provides little incentive for the Fed to cut

The US unemployment rate reached the highest level since 2021 in the delayed September jobs report. However, strong payrolls and an improvement in regional manufacturing surveys will likely discourage the Fed from acting too hastily. Slower rate cuts are placing more pressure on market liquidity.

• Total US nonfarm payroll employment edged up by +119k in September, but has shown little change since April, the Bureau of Labor Statistics reported overnight. Economists had been expecting +53k.

• However, there were -33k in two-month prior revisions. The August survey was revised down from +22k to -4k, the second negative monthly print since the April tariff announcements.

• Employment continued to trend up in healthcare, food services and drinking places, and social assistance. Job losses occurred in transportation and warehousing, and in federal government.

• The participation rate edged up by +0.1% to 62.4%, leading to an increase in the unemployment rate from 4.3% to 4.4%, the highest level since October 2021 and +0.4% above the level a year ago.

• The BLS will not publish an October 2025 release. Establishment survey data for October 2025 will be published with the November 2025 data, scheduled for publication later in the month than usual, on 16th December. Household survey data will not be collected for October.

• There were also improvements in the outlook in the Fed regional surveys from the New York, Kansas and Philadelphia districts. However, the series are relatively volatile from month to month. Prices also remained a concern with expectations that inflation will continue to exceed the Fed's 2% target.

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• With inflation still above target but growth slowing, the FOMC has increasingly been looking to the labour market for signs that a rate cut would be required.

• Last night's report had something for every outlook. The non-farm payrolls suggested reacceleration, but with high monthly volatility and a continued tendency toward subsequent downward revisions. On the other hand, the rise in the unemployment rate was driven by a combination of job losers and reentrants into the labour force.

• Earlier this week, the FOMC minutes showed that more members were hesitant to cut than the market perceived, consistent with Chair Powell's recent press conference comment that a December cut was "not a foregone conclusion". 

• He also said, “When you’re driving in fog, you slow down”. Today's data was certainly foggy, with no update due before the next meeting. The market has understandably moved to price just a 1/3 chance of a US rate cut on 10th December. However, there is a 90% chance of a cut priced at the following meeting at the end of January, when two more labour reports will be available.

• In the short term, the change in pricing depresses Treasury Bill prices, reduces repo collateral values, and places additional downward pressure on liquidity.

• Capital markets have become increasingly sensitive to market liquidity as it has become less abundant. We will be watching to see if there is any improvement after quantitative tightening (QT) ends on 1st December. But expect higher quality liquid assets, such as government bonds, to continue to see demand.

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