US: Softer jobs data strengthen the case for a Fed pause

• September payrolls rose by just 29,000, below the 90,000 consensus.
• Downward revisions removed a combined 60,000 jobs from July and August.
• Unemployment increased to 4.2%, while annual wage growth eased to 3.0%.
• Slower hiring and weaker pay pressures support the case for leaving rates unchanged in October.

The US labor market is losing momentum, as confirmed by today’s NFP report. Weaker hiring and softer wage growth reduce pressure on the Fed to raise interest rates. In the initial market reaction, the dollar strengthened, gold gained and US Treasury yields fell. Sentiment on Wall Street is improving, with both the S&P 500 and Nasdaq 100 moving higher.

September’s employment report weakened the argument that US hiring was picking up speed. Employers added only 29,000 jobs, while revisions substantially reduced the gains reported in previous months. August’s increase was lowered from 162,000 to 133,000, and July’s initial gain of 21,000 became a loss of 10,000.

The disappointment therefore extended beyond the latest headline. The revised figures suggest that demand for workers has been more subdued than previously thought, giving the Federal Reserve additional reasons to assess incoming data before tightening policy again.

The unemployment rate edged up from 4.1% to 4.2%. Meanwhile, average hourly earnings increased by just 0.1% month on month, bringing annual wage growth down to 3.0%, from 3.1% in August and 3.8% a year earlier.

For the Fed, easing wage growth is a useful counterweight to concerns about rising energy costs. It suggests that the labour market is contributing less to persistent inflation. Although this does not resolve the broader inflation problem, it reduces the urgency of another rate increase.

Monthly payroll figures have been volatile, making the underlying trend more informative than any single release. Over the past six months, employment increased by an average of 66,000 per month. That pace is modest, but lower immigration means fewer new jobs are needed to accommodate growth in the workforce and keep unemployment broadly stable.

The sector breakdown also showed a mixed picture. Healthcare added 23,000 jobs and manufacturing gained 9,000, while government employment fell by 17,000. Temporary employment declined by 11,000, potentially signalling greater caution among businesses before they make longer-term staffing commitments.

These figures point to a cooling labour market rather than a sharp contraction. However, they provide little support for the stronger hiring momentum suggested by the initial August report.

Weak job creation, downward revisions and slower wage growth reinforce the case for an October pause. Policymakers who prefer to gather more evidence before raising rates again now have a stronger basis for that position.

I continue to expect another increase in December rather than October. Whether further tightening proves necessary will depend on subsequent inflation and activity data, particularly the extent to which higher energy prices feed into broader price pressures.

For financial markets, reduced expectations of near-term tightening could weigh on the dollar and short-dated Treasury yields while supporting gold. The implications for equities are less straightforward. Lower rate expectations help valuations, but a sustained slowdown in hiring could eventually weaken household spending and corporate earnings.