NFP numbers surge past estimates, markets react on expectations for another Fed rate hike

US employment saw an unexpected surge in September, marking the largest increase since the beginning of the year. This growth highlights a strong labor market, potentially increasing the likelihood of another Federal Reserve interest rate hike. However, there is a positive sign for the central bank, as wage growth is slowing down.

Nonfarm payrolls significantly exceeded expectations, with employers adding 336,000 jobs in September—nearly double the projected figure and the highest since January. Additionally, revisions to previous data added 119,000 more jobs for July and August. The unemployment rate, meanwhile, held steady at 3.8%.

What does this mean for the Federal Reserve?

The headline job figure is robust, and steady wage growth supports the case for another interest rate hike this year. However, the underlying details are less promising: the average number of hours worked remained flat, and the labor force participation rate was unchanged. This suggests that employers aren’t drawing many additional workers into the job market, hinting that labor market conditions may not be as strong as they appear.

Initially, markets reacted sharply to the jobs report, with S&P 500 and Nasdaq 100 futures falling and the yield on 10-year Treasuries spiking. Gold prices also dropped.

However, there is another perspective. If the Federal Reserve adopts a forward-looking approach and takes into account potential negative risks ahead, they may not heavily rely on this jobs report when making decisions. Instead, they could stick to the belief that the labor market is gradually cooling. While the chances of a rate hike have increased after this report, it is still possible the Fed may decide to hold rates steady for the remainder of the year.