Labor Market Remains Historically Strong

Labor data spurs another sell-off. Nonfarm payrolls’ significant beat sent rates soaring 17+ bps higher in the morning, a reflection of increased hike bets amid a robust labor market. Yields grinded lower throughout the remainder of the day but still closed 6-9bps higher, the 2y and 10y UST yields now at 5.08% and 4.80%, respectively. Hot inflation data next week could push the Fed closer to another 2023 rate hike, which the market currently prices as a 50/50 probability.

Blowout jobs report means more hikes are likely. Nonfarm Payrolls increased 336,000 in September, and prior results saw significant upward revisions. Hiring was broad-based, led by the leisure and hospitality, healthcare, and professional and business service sectors. Average hourly earnings also increased, but the YoY pace slowed to 4.2%, the smallest since mid-2021. Strong hiring suggests companies are confident about sales prospects, and overall, today’s report signals a durable labor market. This does not bode well for the Fed’s fight against inflation, as a resilient labor market is a key source of strength for household spending and the broader economy.

Inflation week ahead. CPI and PPI will headline next week’s activity, where the Fed will hope for signs of deceleration, especially after today’s labor data. August CPI was slightly above expectations, but more troubling was PPI, which was driven significantly higher by elevated gasoline prices. However, the rise in gasoline prices was largely due to idiosyncratic events that are out of the Fed’s control, such as OPEC+ supply cuts. So, core inflation is under the Fed’s microscope, which is expected to produce mixed results.