US September non-farm payrolls: What to expect

Overview

With US pricing pressures making steady progress towards the Federal Reserve (Fed)’s 2% target, policymakers’ primary focus has now shifted more towards supporting the labour market over inflation. The shift may be warranted, given that US inflation is now at a three-year low while unemployment rate touched a near three-year high back in July this year at 4.3%.

This is reinforced at the September Fed meeting, where policymakers guided that the risks to its dual mandate “are roughly in” balance now. However, while delivering a jumbo 50 basis point (bp) cut, policymakers still stuck to their usual script of being data-dependent on the future direction of rates.

Realignment between market expectations and Fed’s guidance needed

Policymakers’ views are for two more quarter-point rate cuts in November and December, but the rates market has its reservations. Market expectations are leaning slightly towards 75 bp worth of easing by the end of this year, with potentially a 50 bp cut in December. Either side will have to readjust their views eventually and with rate decisions to be made on a “meeting by meeting” basis, we may expect sentiments to be highly sensitive to the upcoming non-farm job report to move the dial around the Fed’s rate path ahead.

What to expect for the upcoming US non-farm job report?

Expectations are for the US economy to add 148,000 jobs in September, up slightly from the previous 142,000, while the unemployment rate is expected to remain unchanged at 4.2%. Data over the past months have generally been softer than expected, with US job additions undershooting expectations for the past two months, while unemployment rate has been higher than forecasts in five out of six months since April 2024.

While some labour softness is expected, as long as the US labour market is not falling off the cliff such that it warrants a 50 bp cut from the Fed in November, risk sentiments may find some relief. In our view, this may come in the form of 120,000 - 180,000 range for job addition, which is in line with average pre-Covid years and hence can still be argued in the frame of an economic normalisation in place, rather than a deterioration.

For US unemployment rate, staying at the current 4.2% or even a slight uptick to 4.3% may still be tolerable, given that the Fed’s latest economic projections called for a year-end projection of 4.4%. Fed Chair Jerome Powell also mentioned that the current 4.2% rate is ‘healthy’. Key risk to markets will be a surprise overshoot in the unemployment above the Fed’s 4.4% forecast, which could suggest that policymakers are underestimating growth risks and call for more urgent cuts.

What do other labour data say?

US labour market data this week has been mixed. The US Institute for Supply Management (ISM) manufacturing Purchasing Managers' Index (PMI) revealed manufacturing employment contracting at a faster rate (43.9 versus 46.0 prior) in September. US services PMI data will be revealed today, but in the past seven months, services employment has been weaker than expected on six occasions.

However, this weakness will be weighed against better-than-expected private payrolls (143,000 versus 124,000 est) and job opening numbers (8.04mn versus 7.64mn est). More broadly, the US economic surprise index has also reverted into positive territory this week for the first time since May 2024. Overall, this may support the view for soft US labour conditions to persist, but unlikely to sound the alarm on economic distress just yet.

What’s next for the US dollar?

The US dollar has found room to stabilise in the near-term, with buyers hoping to push for a one-month high above the 101.50 level of resistance. Any signs of labour market resilience in the US non-farm job report may help to trigger a recalibration in market rate expectations, which are presently more dovish compared to US policymakers’ views.

While ongoing geopolitical tensions and the uncertainty around the US elections may help to offer some near-term support to the US dollar, we remain cautious over any sustained recovery. This is given that the aggregate net-short US dollar positioning versus other G10 currencies remains at its highest level in a year, based on Commodity Futures Trading Commission (CFTC) data. Seasonality for the US dollar also shows a general drift higher from mid-October into November, before a sell-off through December which may drag the US dollar to end the year lower.