The US Bureau of Labor Statistics has reported a surprise upswing in payroll employment, up 336,000 in September, well above market expectations (170,000).
The improvement was driven by jobs boosts in leisure and hospitality; government; health care; professional, scientific, and technical services; and social assistance.
The September surge has heightened the risk of further monetary policy tightening from the Federal Reserve as it continues its battle against inflation.
This is despite no change to the unemployment rate, which held steady at 3.8 per cent.
“There are always doubts about data quality when you get such wide discrepancies between different data sources, but payrolls is the number the market puts most emphasis on and we have to acknowledge that such strength keeps alive the prospect of another rate rise and fits with the Fed’s higher for longer narrative surrounding the policy rate,” James Knightley, chief international economist at ING Economics, said.
He said Fed hawkishness would be further entrenched if the upcoming release of the consumer price index (CPI) and the product price index (PPI) point to a setback in the fight to return inflation to the 2 per cent target.
“The doves will cite the trending higher of unemployment and the subdued wage print, but that won’t matter much if next week’s CPI and PPI reports come in hot,” Mr Knightley added.
“The current consensus is for core CPI to rise 0.3 per cent month-on-month, which is still too high for the Fed, which wants to see 0.1 per cent or 0.2 per cent month-on-month prints.”
The payroll jobs surprise put upward pressure on bond yields, with the US 10-year Treasury yield rising 8 points to 4.8 per cent, while the US two-year Treasury yield rose 6 points to 5.08 per cent.
Over the past week, the 10-year yield increased 22 points – the largest increase since July – while the two-year yield rose by 4 points.
Mr Knightley said higher yields may do the Fed’s job, reducing the need for a hike to the funds rate.
But ultimately, Mr Knightley said he believes monetary policy is “restrictive enough” to achieve the Fed’s medium term inflation objective.
The Federal Reserve has increased the funds rate (currently 5.25–5.5 per cent) by a cumulative 500 bps since commencing its tightening cycle in March 2022.
The next Federal Open Market Committee (FOMC) is scheduled for 31 October.
In Australia, the Reserve Bank has wound down its tightening cycle, keeping the cash rate on hold at 4.1 per cent for four consecutive months.
Economists are split on the outlook for Australia’s monetary policy strategy, with many expecting one final hike before the end of 2023.
However, other observers, including Commonwealth Bank and AMP economists, believe the cash rate has peaked and expect easing to commence in 2024.
Australia’s upcoming quarterly CP print, due on 25 October, is expected to set the tone for future monetary policy determinations.