• US non-farm payroll employment rose only 12,000 in October
   
• Revisions to the two prior months were lower by 112K from the previously reported figures
   
• Unemployment rate steady at 4.1%

• Average hourly earnings gain 0.4% MoM, 4.0% YoY

• Labor force participation rate ticked down from 62.7% to 62.6%

• Expect the Fed to cut interest rates by another 25 bps

October’s payroll report surprised to the downside. The economy added just 12K jobs in October. Adding to the disappointment, downward revisions shaved 112k from the two prior months’ gains with the change in total NFP employment for August was revised down by 81K and the change for September was revised down by 31K. Overall, headline job growth came in well below forecasts, though market reaction remains tempered, as the data is widely believed to be heavily skewed by recent hurricanes and strikes. The ongoing Boeing strike helped to cut over 40K from the headline number in October, while Hurricanes Helene and Milton also likely had a heavy hand weighing down the payrolls figure.

Private payrolls were lower by 28K in October, with the largest declines seen in professional & business services (-47K) – all related to a pullback in temporary help (-48.5K) – and manufacturing (-46K), though this was largely due to the ongoing Boeing strike. Another leading sector, leisure and hospitality, saw a drop of 4K, while retail trade and transportation and warehousing also reported modest declines. Meanwhile, education & healthcare (+57K) and government (+40K) recorded solid gains last month. Job creation across most other industries was relatively flat.

The unemployment rate was unchanged at 4.1% as the number of unemployed people was little changed at 7.0mn. Participation rate ticked down from 62.7% to 62.6%. Average hourly earnings rose 0.4% MoM and 4.0% YoY.

In the household survey, a sharp decline in civilian employment (368K) largely offset a pullback in the labor force (-220K). Worker strikes, most notably at Boeing, reduced the headline gain by about 40K. The precise impact from Hurricanes Helene and Milton is much harder to discern, but the separate survey of households showed there were 512K workers who were not on the jobsite due to weather in October, suggesting that work disruptions played a major role in the payroll miss. The unemployment rate, which is derived from the household survey and counts those not working due to a strike or severe weather as employed, held steady at 4.1%. The labor force participation rate fell 0.1 percentage points to 62.6%. The so-called U-6 unemployment rate, which also includes people who want to work, but have given up searching and those working part-time because they cannot find full-time employment, was also unchanged at 7.7% in October.

Average hourly earnings rose 0.4% MoM, a modest acceleration from September’s downwardly revised reading of 0.3% MoM. On a twelve-month basis, wages were up 4.0% from 3.9% in September.

Expect the Federal Reserve to cut rates by 25bps at the November meeting

At first glance, October’s jobs report paints a picture of growing fragility in the U.S. labor market, but under the surface is a muddy report roiled by climate and labor disruptions. While the impacts of these events are real and should not be ignored, they are likely temporary and not a signal of a collapsing job market. Between the ongoing Boeing strike and the devastating impacts of Hurricane’s Helene and Milton, we knew this was going to be messy employment report. While the Bureau of Labor Statistics did not provide any point estimates of hurricane impacts, they did note that the storms “likely” had some impact on last month’s figures. Putting that aside, revisions to prior months were meaningfully lower, which on top of October’s disappointing reading pulled the threemonth moving average down to 104K, well below what’s required to meet current growth in the labor force. However, given the various factors impacting last month’s numbers, it’s too early to draw any meaningful conclusions from October’s job report.

Other data out this week continued to point to a labor market that is decelerating but not necessarily deteriorating. Job openings continued to trend lower in September while hire and quit rates are now at or below pre-pandemic levels. This has helped to pressure compensation growth lower, with the Employment Cost Index slowing to 3.9% on a yearago basis in the third quarter. Amid the ongoing pickup in productivity, this suggests the Fed’s preferred wage metric is now growing at a pace broadly consistent with 2% inflation. With unemployment rate holding steady and wage growth surpassing expectations, the underlying labor market still appears resilient. While this report slightly adjusted market expectations, there remains a near 95% probability of a 25 bps rate cut by Fed this week.

The biggest events this week from the United States is the US Election which is on Tuesday with the FOMC meeting following the very next day. The jobs data downgrades have really cemented rate cuts from the Fed at both the November and most likely December meetings.

The US Election is the one with the most uncertainty as polling has thrown up extremely mixed numbers. Betting websites have Donald Trump as the front runner, while a Reuters/Ipsos poll and a few others have Kamala Harris in the lead. The question is who prevails and what will the impact be? A Trump win could help benefit Gold prices as market participants may use it as a hedge against the pending uncertainties. Besides Gold we could see some wild swing in US Dollar pairs, Wall Street Indexes and potentially a knock on effect for markets as a whole as risk sentiment sways back and forth. On the other hand, Harris’ proposed policy mix is more targeted and perceived to have a more modest impact on both interest rates and the USD.

As a result, the Fed will likely look through October’s noisy employment data, and instead focus more on the broader trends showing that the labor market is decelerating but not necessarily deteriorating. Moreover, with the Fed’s preferred wage metric – the Employment Cost Index – showing wage pressures now growing at a pace roughly consistent with 2% inflation, the FOMC should have all the confidence they need to continue to gradually reduce the policy rate. We expect the Fed to cut by 25 bps at this week’s meeting. While this decision seems almost certain, the U.S. elections remain a wild card, promising to keep everyone on edge until the final votes are tallied.

Source: BIMB Securities Research - 5 Nov 2024