Stronger payrolls for September won’t disrupt risk recovery

US Payrolls were stronger than expected in September, and rose by 119k, private sector payrolls rose by 97k, and wage growth also rose a notch to 3.8%.  On the surface, this suggests that the US labour market is stronger than feared, however, if you dig a bit deeper, then there are cracks starting to appear in the labour market and this report does not take a Fed rate cut off the table, even if the FOMC minutes from the October meeting were slightly more hawkish than expected.

Fed cut expectations rise

There is some nuance to this report. The unemployment rate jumped to its highest level since 2021 at 4.4% from 4.3%, and there were revisions to the August payrolls number, which fell to -4k from 22k initially. Added to this, more timely data, including continuing claims rose to 1.97mn, which is a mid-cycle high. This is an interesting development, and the market is boosting the chance of a Fed rate cut in its wake.

Bond yields are falling across the curve in the US, the dollar has given back most of today’s gains, and the market has repriced the chance of a Fed rate cut next month from 25% to 37% after the payrolls release.

This report is significant, since we won’t get an October reading for payrolls, and the November report will not be released until after the Fed’s December meeting. Thus, this is the last labour market report before the next Fed meeting. A rising unemployment rate could trigger a cut, since the Fed has a dual mandate to maintain price stability and full employment.

Nvidia: more important for stocks than the Fed

The hawkish Fed minutes and today’s labour market have not dented any enthusiasm for US stocks, which continue to be buoyed by Nvidia’s blockbuster earnings report last night. The stock price is higher by more than 5% in the pre-market, and we expect Nvidia’s share price to be the wave that lifts all ships, with big gains expected for other AI stocks, and for the market more generally. US S&P 500 futures are at session highs after the payrolls report, and European stocks have also risen back towards session highs.

Santa rally, anyone?

Rising expectations of a Fed rate cut, along with extraordinary Nvidia results, and easing fears of an AI stock bubble is a powerful tonic for financial markets. Not only could Nvidia’s shares surge to $200 per share, a key psychological high, but it could also ignite a Santa rally into y6ear end. The bears might have been too early, once again.

Chart 1: US unemployment rate at highest level since 2021

Source: XTB and Bloomberg