Weaker payroll in October reinforces expectations of interest rate maintenance in the US in December

With weaker payroll data for October released this Friday (3) by the US Department of Labor, the likelihood of the Federal Reserve deciding to maintain the interest rate at the current level increased, according to economists. The assessment is that the details of the US non-agricultural payroll corroborate the reading of a slowdown in the labor market, bringing less pressure to inflation.

The indicator showed the creation of 150 thousand jobs in the month, compared to a projection of 180 thousand new jobs and below the 297 thousand vacancies observed in September. The unemployment rate, in turn, increased from 3.8% to 3.9%, the highest since January 2022 (4.0%).

Rafaela Vitório and André Cordeiro, economists at Banco Inter, also highlighted that salaries advanced less than expected, with a rate of 0.2% in the month and accumulating an increase of 4.1% year on year.

Cordeiro recalls that, in the most recent calculation, the salary increase is even more significant. “In the annualized accumulated over the last 3 months, salaries have increased by 3.2%, a pace compatible with the 2% inflation target, and on a downward trend, which is good news for the Fomc”, he comments.

He also highlights that sectors considered very cyclical, such as residential construction, manufacturing, logistics and temporary workers, completed seven consecutive months of negative job addition. In the last 12 months, 10 sectors had negative growth.

He considered that, even so, the job market remains quite tight, which justifies the scenario of high interest rates for a longer period of time, as outlined by the Fed at the last meeting.

Chief economist Rafaela Vitória recalls that the interest rate market abroad, which was already breathing a sigh of relief with President Jerome Powell’s post-Fomc speech, continues to fall, with the 10-year rate returning to the level of 4.5%, or 50 basis points below the 5% peak from 10 days ago. “The scenario reflects the expectation of the end of the cycle there, that is, we should not see new interest rate hikes and the first cuts could start to happen at the end of the first half of 2024”, she estimated.

Gustavo Cruz, chief strategist at RB Investimentos, also states that the data reinforces the market’s expectation that there is a high chance that the Fed will not raise interest rates any further.

CME Fed Watch, a platform that tracks projections for monetary policy decisions, has already detected a change. The probability of the Federal Reserve maintaining interest rates is now 90.4%, with 9.6% still predicting an additional 25 percentage point hike on December 13. A week ago, bullish bets were at 79.1% and a month ago, at 53.3%. After payroll, the majority bets are that interest rates could be cut in May.

“The payroll showed more job losses and more unemployment growth, among the least educated part of Americans. It could mean that, later on, the report becomes stagnant or even slightly worsens. Which for interest rates, for risk appetite, is a little better. The report hasn’t been this weak for a long time,” he commented.

CM Capital highlighted in a report that, in the composition of the indicator, it is possible to verify that the segments that drove the creation of jobs throughout October are not necessarily those with the greatest dynamism in the economy as a whole. Especially in the cases of the health sector and the public sector, which should be seen as specific factors and not components of the trend in the result.

“In the first case, it is important to reinforce that closing the gap in the volume of workers currently and the pre-pandemic level reinforces the perception that the next announcements should be marked by a lower volume of vacancies in this type of segment”, he says CM Capital’s comment.

On the downside, the sharpest drop was observed in industry, which closed 35 thousand jobs. “The sector’s results suffered significantly from the impacts of the strike in the automobile sector, which froze the creation of vacancies in a relatively dynamic segment of the North American economy and responsible for absorbing a significant number of workers over the months. With the end of the strike at the beginning of November, the expectation is that there will be a normalization of vacancies in this sector throughout the end of this year”, warns the report.

Another segment that ended up losing workers during the period was transportation and storage, which ended October with a negative balance of 12 thousand workers. “It is important to pay attention to this number due to the significant correlation that this sector has with the level of economic activity, so that the retraction suffered by the volume of vacancies in the sector suggests that the US economy may have performed poorly over the last month”, pointed out CM Capital

This could be positive news on the inflationary front, with the price cooling process benefiting during the period, he adds.

Claudia Rodrigues, economist at C6 Bank, assesses that the number of vacancies in October is still robust, but is lower than that of the immediately previous period and is below the average for the pre-pandemic period (2019), of 163 thousand per month. “In our view, the numbers released today increase the chances of the Fed keeping interest rates stable at the next meeting in December,” she predicted.

The economist highlighted that inflation and labor market data in November will be essential to confirm or not whether there is in fact a tendency for the economy to slow down and support the Fed’s decision at the next meeting. “For now, the chances of the Fed promoting another interest rate hike this year have reduced, but we believe that the monetary authority should only start to cut them, gradually, towards the end of 2024.”

Antonio van Moorsel, chief strategist at Acqua Vero Investimentos, also considers that US payroll data ratified the prospect of an end to the Fed’s monetary tightening cycle by showing a reduction in the labor imbalance.

“Signs that the largest economy in the world is beginning to slow down, after the end of the summer in the northern hemisphere, endorse the prognosis that the most aggressive monetary tightening campaign implemented by the North American Central Bank in more than four decades is having an effect in slowing down the activity”, he commented.

Because of this, van Moorsel’s assessment is that further adjustments in interest rates are essential, in line with Powell’s speech at the press conference following the release of the Fed’s decision.