The recently released U.S. nonfarm payroll data showed unusually weak growth, raising questions in the market. Will this lead to an adjustment in the Federal Reserve’s policy trajectory? Is there evidence of a genuine deterioration in the U.S. labor market, or are there other contributing factors?

The U.S. nonfarm payroll increased by only 12,000 jobs in October, a sharp decline of 211,000 from the previous month and well below the market expectation of 110,000. The unemployment rate remained at 4.1%, consistent with the prior month.

 
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Why did this month’s nonfarm payroll decline so significantly?

This significant decline can largely be attributed to the impact of Hurricane Milton, the Boeing strike, and BLS’s survey methodology. According to the BLS, its establishment survey only counts individuals who received a paycheck during the week of the 12th each month as employed. In contrast, the household survey counts individuals as employed even if, due to weather disruptions or leave, they did not receive a paycheck in that specific week.

Hurricane Milton made landfall in Florida on October 9, coinciding with the establishment survey period. Therefore, individuals who were unable to receive a paycheck in the week of October 12 due to work stoppages caused by extreme weather were not counted as employed, which is a primary reason for the substantial drop in October’s nonfarm payroll numbers.

Is Weather the Primary Factor Behind Weak Employment Data?

Other data supports this explanation. First, the household survey counted those who had a job but were unable to work due to adverse weather. The number of individuals who could not work due to inclement weather reached 512,000 in October, an increase of 460,000 from the previous month and the highest figure since January this year.

Additionally, ADP reported a 233,000 increase in private-sector employment for October. ADP considers all employees with payroll records during the month as employed, so even if individuals missed a paycheck during the week of the 12th due to work stoppages, they were still counted if they received pay in other weeks. This difference in definition is a primary reason for the disparity between ADP’s and BLS’s data.

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Moreover, the Boeing strike may have also affected this month’s nonfarm employment data. Manufacturing employment in October fell by 46,000, with employment in transportation equipment manufacturing down by 44,400, likely reflecting the 33,000 workers impacted by the Boeing strike.

Overall, although October’s nonfarm employment figures showed a significant decline, this was largely driven by short-term factors. However, other indicators suggest that the labor market is still cooling. U.S. job openings have dropped to their lowest level in nearly three years, and voluntary quits have fallen to their lowest level since June 2020, indicating that labor demand from companies is waning, though no marked deterioration has yet occurred.

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Following the Federal Reserve’s two-rate cut and release of its latest Summary of Economic Projections (SEP) on September 18, the U.S. 10-year Treasury yield has surged by 60 basis points over the past two months, from around 3.7% to approximately 4.3%. Why have Treasury yields risen so sharply? We attribute this trend to several key factors:

Market Overestimation of Rate Cuts
Earlier, the market was more optimistic about rate cuts, generally expecting that a potential recession in the U.S. would prompt the Fed to lower rates by over 11 cuts in this cycle. As a result, the 10-year Treasury yield declined to around 3.65% between July and September. However, the SEP released on September 18 indicated that rate cuts may only total approximately 10 basis points in this cycle, with the Fed expressing confidence in managing inflation and stabilizing the labor market. This shift led the market to recalibrate expectations, pushing the 10-year Treasury yield up by 20 basis points to around 3.85%—a key initial factor behind the rise in yields.

(Source:  Fed)

Stronger-than-Expected Economic Data
At the Fed’s meetings in July and September, the emphasis shifted from inflation to the labor market, with the market trading Treasuries based on the notion that “a deteriorating labor market could trigger a recession in the U.S.”

However, unexpectedly, the employment data released on October 4 significantly exceeded market expectations. Non-farm payrolls for September saw a substantial increase, and the unemployment rate declined once again. Although October’s non-farm payroll data showed a sharp drop, this was primarily due to temporary impacts from hurricanes and strikes. The ADP data indicates that the job market remains robust, which has led the market to raise its interest rate expectations again. As of November 1, the U.S. 10-year Treasury yield has risen to approximately 4.38%.

(Source:  CME, FedWatch, TrendForce)

Additionally, recent data on retail sales and GDP have highlighted robust consumer spending, with consumer confidence also climbing steadily. These indicators underscore the resilience of the U.S. economy, contributing to the recent rise in Treasury yields.

Potential Debt Expansion in Coming Years
While the U.S. Treasury on October 30 announced no changes to its long-term bond issuance size and the Treasury Secretary signaled that issuance would remain steady for upcoming quarters, potential increases in U.S. debt may be inevitable. The lack of a strong focus on deficit reduction among presidential candidates in the ongoing election cycle suggests debt growth may persist, which is another significant factor driving up recent Treasury yields.
Overall, if economic data continue to show strength, the Fed’s ability to cut rates may remain constrained. Meanwhile, though the Treasury plans to maintain issuance levels in the short term, the absence of a deficit reduction focus among candidates signals ongoing risks of fiscal expansion. These factors are likely to exert further upward pressure on U.S. Treasury yields.

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Last week, U.S. equity markets experienced a pullback, primarily driven by declines in the tech sector, leading the S&P 500 to drop 1.37%. In the bond market, decreasing election uncertainty and a resilient labor market caused yields on 2-year and 10-year Treasuries to rise to 4.212% and 4.386%, respectively, slightly widening the yield spread to 16 basis points. Meanwhile, the dollar index remained steady around 104.

Key Economic Data Review for Last Week:

U.S. Q3 GDP: U.S. Q3 GDP grew at an annualized rate of 2.8% (previous: 3.0%). Consumption rose by 3.7% (previous: 2.8%), contributing 2.46 percentage points, while imports grew by 11.2% (previous: 7.6%), with a negative contribution widening, reflecting strong consumer demand. Residential investment and inventory changes acted as primary drags, but as rate expectations ease and election uncertainty dissipates, the housing market and corporate investment are expected to strengthen.

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Bank of Japan Rate Decision: The Bank of Japan held rates steady at 0.25%, in line with market expectations. BOJ Governor Kazuo Ueda indicated that if economic performance aligns with projections, further rate hikes could be implemented. He also stated that with a more stable market environment, the BOJ no longer needs extra time to observe market dynamics.

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U.S. October Employment Data: Due to the impacts of hurricanes and the Boeing strike, October nonfarm payrolls increased by only 12,000 (previous: 223,000), while the unemployment rate held at 4.1%. However, ADP data shows private-sector employment rose by 233,000 (previous: 159,000), suggesting a robust labor market when unaffected by temporary factors.

 
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Key Economic Data Review for This Week:

China NPC Standing Committee (11/4 – 11/8): Markets will closely watch for additional fiscal stimulus measures and debt issuance aimed at boosting domestic demand. According to Reuters, the upcoming policies could total approximately 10 trillion yuan ($1.4 trillion).

U.S. Presidential Election (11/5): Odds from RealClear Politics and various betting platforms indicate Trump as the likely winner of this election. Polls, however, show both candidates in close contention, with results from key states expected between 11/6 and 11/8.

U.S. Monetary Policy Decision (11/7): Recent U.S. economic data has been strong, with core PCE growth in Q3 easing to 2.2% (previous: 2.8%). Despite a lower-than-expected nonfarm payroll increase of 12,000 in October (due to hurricanes and strikes), the unemployment rate remains at 4.1%. With the labor market still stable, markets anticipate the Fed will cut rates by 25 basis points at this meeting, with another 25-basis-point cut expected in December.

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• Exclusive: China considers over $1.4 trillion in extra debt over next few years

The Bank of Japan (BOJ) announced on October 31 that it would keep the policy rate unchanged at 0.25%, meeting market expectations. This decision marks the second consecutive meeting of rate stability following the BOJ’s rate hike in July.

In its quarterly outlook report, the BOJ forecast that core inflation for fiscal year 2024 will remain around 2.5% due to easing pressures from import prices, with a gradual decline toward 2% expected between 2025 and 2026 amid moderate wage growth.

Regarding economic growth, the BOJ stated that Japan’s GDP growth has the potential to exceed its potential growth rate (0.5-1%) under conditions of continued financial easing and modest overseas economic growth.

(Source: BOJ)

In the post-meeting press conference, BOJ Governor Kazuo Ueda remarked that, if economic and price trends evolve as anticipated, the central bank would respond by raising rates. Ueda also noted that factors contributing to market volatility, such as weak U.S. economic data, are gradually fading and that market stability has improved. While the upcoming U.S. election poses a potential risk, the BOJ would not require extended time to monitor market conditions.

Ueda’s comments reinforced his traditionally hawkish stance. According to Bloomberg, the majority of economists now believe that the probability of a rate hike in January has increased, with market expectations for a January hike rising from 19% in September to 32% in October.

 

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• Outlook for Economic Activity and Prices
• Ueda Indicates BOJ Still on Track for More Rate Hikes After Hold