Dovish NFP Report Clobbers October Rate Hike Expectations

The September US employment report delivered a dovish combination that markets had been anticipating. Payrolls rose just 29K, missing the consensus estimate of 90K, and unemployment edged up to 4.2%. Average hourly earnings slowed from 0.3% to 0.1% month-over-month and stood at 3.0% year-over-year.

The revisions made the deterioration more significant, with July payrolls revised down from +21K to -10K and August payrolls revised from 162K to 133K. Together, the prior two months were marked down by another 60K.

Despite some resilience in the household survey, the establishment survey and wage data delivered the important message: hiring momentum has slowed substantially, and labor costs did not provide the hawkish counterweight that had been possible after Thursday's surge in ISM Prices Paid.

The immediate rates reaction showed how decisively markets interpreted the report. US 2-year Treasury yields fell toward 4.72%, while US 10-year Treasury yields dropped back toward 5.18%. The probability of an October Fed hike jumped to around 86%, but the odds of a hike in October fell into the low teens from more than 60% only a week earlier.

The Dollar Index, which had been threatening a breakout toward 103, was knocked back below 102 after the NFP headline. Despite this, the technical conclusion should remain restrained: NFP has capped the Dollar rally; it has not yet reversed it.