The probability of a rate hike in October plummeted in a week—can non-farm payrolls rewrite the Federal Reserve's script again?

Huitong Network, October 2 — The September Nonfarm Payrolls will be released tonight: the consensus is 91,000, with a forecast range spanning from 35,000 to 180,000. Both ADP and ISM manufacturing employment exceeded expectations, and initial jobless claims fell to 196,000. While traditionally hawkish in terms of seasonality, September is the hardest to adjust, and the past four years have consistently beaten expectations. The probability of a Fed rate hike in October has dropped to 25%, but the nonfarm payrolls may once again alter expectations.

The September Nonfarm Payrolls report, to be released on Friday (October 2), is the most-watched economic data in global markets this week.

The market consensus expects an increase of 91,000 jobs, but the forecast range varies hugely from 35,000 to 180,000, reflecting significant uncertainty in the data itself. The previous value in August was 162,000, and in July only 21,000. The consensus for private sector employment is 85,000, and the unemployment rate is expected to hold steady at 4.1%.

A number of leading indicators released this week were overall strong: ADP private payrolls grew by 90,000, above the expected 75,000; ISM manufacturing employment was 52.7, also beating expectations; initial jobless claims during the reference week fell to 196,000, below last month's 206,000.

The probability of a Fed rate hike on October 28 is currently priced at 30%, a sharp drop from a week ago, but the nonfarm data could once again change this expectation.

Market Consensus: 91,000 New Jobs, But Extremely Wide Forecast Range

The consensus expectation for September Nonfarm Payrolls is an increase of 91,000 jobs, but the forecast range is from 35,000 to 180,000, a span as wide as 145,000. This extremely broad range itself indicates that there are serious disagreements in the market about the data.

By comparison, August saw 162,000, while July had only 21,000. The consensus for private sector employment is 85,000.

Other key indicators: The unemployment rate is projected to remain at 4.1% (previous value was 4.1%), labor force participation rate previous value 61.6%; U6 unemployment rate previous value 7.7%; average hourly earnings year-on-year expected to grow by 3.2% (previous 3.1%); monthly hourly earnings expected to grow 0.3%, flat with prior; average weekly hours expected at 34.3, versus previous 34.4.

This Week’s Leading Indicators: Overall Strong, With Both ADP and ISM Manufacturing Employment Beating Expectations

A number of labor-related indicators published this week were generally strong, offering some positive signals ahead of the nonfarm release.

The ADP report showed 90,000 new jobs in September, above the expected 75,000 and well above the prior 36,000. ISM Manufacturing Employment came in at 52.7, beating the forecast of 52.0 (prior was 52.8). Challenger job cuts were 43,281, lower than the previous 52,881.

Philadelphia Fed’s employment component was +11.8, lower than the previous +27.9; Empire State employment was +10.6, above prior +9.3.

Initial jobless claims during the survey week were 196,000, below last month's 206,000. Revelio Labs recorded +57,000, higher than the previous +41,000. ISM Services Employment component has yet to be released.

Seasonal Factors: September Data Historically Soft, But Has Beaten Expectations Four Years in a Row

According to BMO statistics, September nonfarm payrolls tend to be on the soft side seasonally, with a 64% chance of coming in below expectations and 36% above. On average, below expectations by 92,000 and above by 65,000. However, it’s worth noting that the past four years’ September nonfarm data have consistently exceeded expectations.

For the unemployment rate, the probability of coming in below expectations in September is 57%, above is 18%, and meeting expectations is 25%.

Overall, seasonal factors are slightly hawkish, but September has traditionally been the most difficult month for seasonal adjustment.

This background means that even if the data is slightly below consensus, it does not necessarily indicate a substantial deterioration in the labor market; conversely, if the data significantly exceeds expectations, its signaling effect will be more reliable.

Fed Pricing: October Rate Hike Probability Falls to 25%, Nonfarm May Again Rewrite Expectations

Before the release of this nonfarm report, the market is pricing a 25% chance of a Fed rate hike on October 28. This figure has dropped sharply over the past week, mainly driven by dovish comments from Fed officials Williams and a softer PCE report. The nonfarm numbers could become another game-changing factor, and given the Fed's data-dependent stance, may trigger another significant repricing.

From a risk-balance perspective, softer numbers will reduce the urgency for rate hikes, while stronger data may reopen the discussion for an October rate hike—though unless accompanied by robust wage numbers, a single nonfarm report alone may not constitute a game changer.

The market is currently highly sensitive to economic data, so whichever way the data turns, substantial volatility could be triggered.

Summary

The key focus of the September Nonfarm Payrolls report: the consensus is 91,000, but forecast range is wide, reflecting severe market disagreement; this week’s leading indicators were overall strong, with both ADP and ISM Manufacturing Employment exceeding forecasts; seasonal factors are slightly hawkish but September is the hardest month for seasonal adjustments; the probability of a Fed rate hike in October has dropped to 25%, but nonfarm could still rewrite expectations.

From a risk-balance point of view, softer data will reduce the urgency to raise rates, stronger data may reopen the October rate hike debate, but unless accompanied by strong wage numbers, a single data release is unlikely to be game-changing. The market is very sensitive to data right now, and no matter the result, substantial volatility may ensue.