Markets Prepare for Labor Data

Rates mixed ahead of tomorrow’s labor data. Tomorrow’s crucial slate kept rates calmer today, as the short end of the curve fell no more than 4bps and the long end rose just over 3bps. Today’s initial jobless claims came in at 207k, still near lows not seen since January and providing a glimpse into the tight labor market. Markets will hope for weaker NFP and unemployment data tomorrow, which could pave the way for aversion to incremental rate hikes and a significant UST rally.

BLS labor data preview. Nonfarm payrolls data (NFP) is expected to show slower jobs growth in September (170k) vs. August (187k), dipping to the lowest level since 2021, while the unemployment rate is expected to tick slightly lower MoM (3.7% vs. 3.8%). Average hourly earnings are expected to increase slightly MoM (0.3% vs. 0.2%) but hold steady YoY (4.3%). The BLS labor data follows yesterday’s ADP employment data which showed a sharp decline in employment growth MoM and may foreshadow tomorrow’s results. The data also comes at a pivotal moment for Fed positioning, where policymakers are balancing keeping policy restrictive enough to stem inflation while still aiming for a “soft-landing.”

Fed hawk Daly suggests the end of the cycle has already passed. The most recent Fed Dot Plot showed that most Fed officials were in favor of an incremental 25bp rate hike, but Mary Daly argued that there may be no need. Daly cited the labor market and inflation as hopes for a pause, saying, “If we continue to see a cooling labor market and inflation heading back to our target, we can hold interest rates steady and let the effects of policy continue to work.” However, she noted that a hike may be necessary given that lower inflation and a looser labor market are far from a given, and tomorrow’s NFP and unemployment rate figures will be another signal of the economy’s direction.