October non-farm payrolls were meaningfully higher than expected, increasing by +165k versus consensus for +70k; on a trailing twelve-month basis, the U.S. economy has averaged +48k in monthly gains. In addition, August and September payrolls were revised up by +60k and +24k, respectively, more than offsetting the downward revisions in the previous report.
Job gains in October were wide-ranging and consistent with the broad strength exhibited by the U.S. economy. Professional and business services (+70k) grew, with health care (+42k), transportation and warehousing (+25k), and financial services (+7k) up as well. Manufacturing (+19k) also increased, bringing job gains in the sector to +101k since the low in December 2025. Leisure and hospitality (-13k) was a somewhat surprising area of decline but represented one of the only weaker industries in this report.
The participation rate rose once again in October, from 61.8% to 61.9%; the measure is up meaningfully from July, where it stood at 61.4%. Even with the increase in the participation rate, the unemployment rate fell to 4.1% from 4.2% last month. Wage growth accelerated, up +0.4% on month-over month basis, translating to +3.1% year-over-year. Average hours worked once again held steady, reflecting the ongoing demand for labor.
The state of the labor market likely does little to change the path for the Fed. After holding rates steady in October, we believe the Fed is likely to raise rates by 0.25% in December in an attempt to tamp down inflation which remains well above their 2% target, and the probability of a rate hike rose to almost 80%. In addition to the war in the Middle East, we see the continued AI buildout as a source of inflation moving into 2027. However, should the pace of AI capital expenditure slow, that may ease some of the pressure in certain categories currently experiencing meaningful price increases; that decline may also translate to broader economic softness.
The payrolls print was overshadowed, however, by the volatility in equity markets this week. The post-election relief rally on Wednesday reversed on Thursday, and stocks had their worst day since the April 2025 tariff drawdown. The S&P 500 Index fell -4.4% and the Nasdaq slid -5.5% into correction territory. The trigger was a heavy sell-off in AI and semiconductor names. The losses were driven in part by an unwind in positioning following the election. Investors are also weighing the impact that a Democratic Congress could have on AI regulation and, perhaps more importantly, the buildout of data centers. The losses, however, may yield opportunities in both equity and credit, and we are focused on taking advantage of the volatility to add selectively to our positions.
