September non-farm payrolls were lighter than expected, increasing by only +29k versus the +90k consensus; ADP payrolls, released earlier in the week, came in at +90k. Notably, there were once again meaningful revisions to the two prior months – this time to the downside. July payrolls swung back to negative as they were revised down by -31k and August’s +162k increase was revised down by -29k.
Moderation in job gains rather than an increase in job losses was the underlying theme. Health care (+17k), leisure and hospitality (+10k), and social assistance (+6k) were all once again positive, but admittedly those gains are more modest than the U.S. economy was enjoying earlier in the year. Construction (+11k) and manufacturing (+9k) were up on the month as well; this increases the cumulative jobs added in manufacturing for 2026 to +72k. Detracting from this month’s print were losses in financial services (-7k) and information (-10k), with much of the loss in financial services coming from (likely AI disintermediated) insurance industry roles. Local government (-13k) reversed some of its recent gains as well.
More constructive was the increase in the participation rate to 61.8%, up from 61.6% in August and 61.4% in July. While the unemployment rate did tick up modestly to 4.2%, it has remained in a range between 4.1% and 4.3% since March, while the number of employed persons rose by +406k (even as the JOLTS report for August reflected its lowest level in six months). Wage growth was modest, up +0.1% month-over-month and +3.0% year-over-year, while average hours worked held steady at 34.4; when combined, the data points support the notion that there is little evidence of upward pressures on wages, and in turn, a broader impact of the labor market on inflation.
Following the Fed’s decision to raise rates by 0.25% in the September meeting and the accompanying hawkish rhetoric from Fed Chair Kevin Warsh, the probability of another hike in October rose meaningfully. However, comments earlier this week from New York Fed President John Williams and Fed Vice Chair Philip Jefferson eased the tension on the front end of the yield curve, and following today’s more dovish payrolls report, expectations for an October rate hike have fallen to less than 20% from almost 65% a week ago. Relief for the front end of the curve is welcome; however, it likely does little to reverse the recent, seemingly relentless push higher in the long end of the Treasury curve, which has been the driver of recent volatility.
This confluence of higher short-term interest rates resulting from more restrictive global central banks and upward pressure on longer term yields is causing us pause – even as data may alter short term expectations. As a result, we are adopting a more cautious stance moving into the fourth quarter. While the global economy remains resilient, we recommend trimming some equity exposure, particularly in more interest rate sensitive assets such as U.S. small and mid-cap stocks, where we are moving from an overweight to an at target position; we remain overweight in U.S. large caps. We also recommend a tilt to quality assets within fixed income and shortening duration modestly. Finally, we are increasing our allocation to commodities, which we believe will benefit from both supply related inflationary pressures and the longer-term AI buildout.
