Earnings Call, Interview, Other
Post NFP Takeaways: Econ, Rates, FX
- Private job growth is projected to reach 46,000 in September, falling short of the 50,000 expectation due to a shift to a 4-week survey calendar compared to the previous 5-week structure, with a three-month average for headline and private jobs forecast to remain near 50,000.
- Sector-specific forecasts indicate a slowdown in leisure and hospitality to 10,000 jobs from 37,000 in August and a decline of 13,000 in local government roles, while education and health services are expected to add approximately 20,000 jobs at a reduced pace, and manufacturing and construction are anticipated to grow decently driven by AI and defense spending.
- The unemployment rate rise to 4.2% is characterized as benign with no expectation of broad job loss pickup, maintaining a stable labor market that does not generate inflationary pressure given the 12-month trend of falling unemployment.
- Wage growth is identified as a dovish signal with average hourly earnings declining by one-tenth of a percent, while core PCE underlying inflation is forecast to continue running at 2.5% year-over-year with little evidence of improvement over the past 12 months.
- A 35 basis point revision in core PCE is not expected to alter the assessment of underlying inflation, which carries persistent upside risks from strong AI investment, higher energy prices, labor tightness, and resilient consumer demand, leading to a view that inflation will remain the primary driver for market pricing regarding the October hike and the following year.
- The Federal Reserve is expected to proceed at a quarterly cadence following a pre-determined path, with a specific call for an October hike to avoid risking larger future increases or losing inflation credibility, despite market pricing for this event settling around 20%.
- Equity markets are anticipated to hold up with a "bull flattening" in U.S. rates supported by a global flattening move, though hitting 7% on 10-year yields could pressure PE multiples and trigger a sell-off.
- The path of least resistance for rates is viewed as higher, necessitating further tightening of financial conditions where credit conditions tighten and investors remain underweight duration while overweight spread products, MBS, IG, high yield, and equities until significant cracks appear.
- A modest broad dollar softness of less than 0.25% is expected for G10 currencies, driven by U.S. resilience and French headlines rather than oil, with the labor report viewed as non-transformative for the dollar in the near term.
- The September 14th CPI data is forecast to be more consequential than the labor report for altering the Fed's trajectory and dollar direction, where a hot CPI would render the labor data inconsequential while a cool report would be more meaningful for a potential dollar sentiment improvement if the U.S. economic picture remains solid.