It’s another first Friday of a new month which means only one thing for markets – the release of the latest US monthly non-farm payrolls report. These figures have historically been the most important single risk event on the calendar, though of course, inflation over the past couple of years has been the focal point. But the Fed’s pivot toward placing more emphasis now on the full employment part of its dual mandate after strong soft core inflation prints puts the spotlight firmly on Friday’s NFP.

Market expectations around the next rate cut at the FOMC meeting in early November will be shaped by the data, with odds moving below 50% for another jumbo-sized 50bps move recently, after relatively hawkish comments from Fed Chair Powell. Recent guidance from the latest ‘dot plot’ signals a pair of 25bps reductions into year-end. We note that this is one of two payroll reports before that next decision on November 7^th with the next labour market update due on November 1^st.

Data expectations

According to the consensus, a similar increase to August in the headline non-farm payrolls is expected for September, while the unemployment rate is expected to stick at 4.2%. The latest Fed projection saw that figure at 4.4% by year end. At the same time, wage growth is expected to slow on a month-on-month basis to a relatively benign 0.3%. As we always say, watch out for revisions to the headline print, which can spark volatility to price action.

A wider question now being asked among economists is actually whether anyone still believes the data. Fed Chair Powell has himself said that he’ll be mentally marking down payrolls’ growth, given we know downward revisions are coming with the annual benchmarking process by the Bureau of Labor Statistics. Remember that the BLS revised downwards the estimate for NFP by 818,000 for the 12 months to March 2024, That meant 2.1 million jobs were added rather than the initially reported 2.9 million for that period, so average monthly gains of 178k instead of 246k.

Before we get to payrolls there have been other job market readings to consider. JOLTS job openings for August, specifically the quits rate which Powell has cited as a labour market indicator, fell. That is consistent with other data showing workers see a less favourable jobs outlook. This was followed by ADP private payrolls for September on Wednesday, though this is never an accurate lead marker for NFP. Challenger mass layoffs during September arrive on Thursday while employment subindices to ISM readings might also blend in with the other releases to inform payroll expectations. Chair Powell has told markets he is looking at a wider range of jobs data. Key is any signs of weaker hiring demand that might be a precursor to higher layoffs. Consumer confidence readings point to households starting to experience a cooling economy which implies increasing worry about redundancies.

Market reaction

If the headline payrolls print below 100k and the unemployment rises to 4.3% or 4.4%, expect the market to price in the prospect of swifter monetary policy easing. Bets will be raised on a 50bps rate cut in November which would likely mean the dollar sells off. The risk rally could struggle, certainly with a much bigger disappointment, as fears rise of a deeper slowdown and recession.

A stronger report would boost the greenback and hurt gold as odds of another big rate cut are further dampened down. This would back up Powell’s comments on Monday stating that the Fed is in no rush to cut rates quickly and another Fed official whose baseline stance is for an “orderly” easing cycle.