Weaker payrolls reduce October Fed hike odds shift focus to September CPI

The latest US payrolls report for September showed weaker-than-expected job growth and slower wage increases, leading markets to scale back bets on a Federal Reserve rate hike in October. The report suggests the labor market is cooling after a brief boost in August, prompting a reassessment of the Fed’s policy path ahead of its October meeting.

As of October 5, the probability of an October rate hike dropped to below 20%, down from 64% on September 25, according to Bloomberg’s World Interest Rate Probabilities (WIRP). While markets still expect a rate hike by the end of 2024, the analysis rules out back-to-back tightening in October, citing the proximity to the November midterm elections. The forecast includes two more hikes, one in December 2024 and another in early 2025, before rates hold steady through the rest of 2025.

The weak payrolls data has also shifted the short-term outlook for the US dollar. Traders are advised to reduce long dollar positions and consider strategies like selling US dollar rallies against stronger currencies. Historically, sharp drops in rate hike expectations have led to a temporary dip in treasury yields and a short-term rally in equities, with implied volatility rising ahead of major inflation releases.

The next critical test will be the September Consumer Price Index (CPI) report due on October 14. If inflation comes in below the projected 2.4% year-over-year mark, it could further pressure the dollar. While near-term weakness in the dollar is expected, longer-term traders may view this as an opportunity to build bullish positions ahead of winter policy meetings.