Nonfarm Payrolls Significantly Below Expectations! U.S. Added 29,000 Jobs in August vs. Expected 90,000; U.S. Treasury Yields Fall, U.S. Stock Futures Rise

The US labor market unexpectedly cooled down, leading to a decline in US Treasury yields, a rise in US stock futures, and further weakening market expectations for a Fed rate hike in October.

Data released by the US Department of Labor on Friday showed that non-farm payrolls in September increased by only 29,000, far below the market expectation of 90,000 and below the lower bound of all forecast ranges. The unemployment rate edged up slightly from 4.1% in August to 4.2%.

Affected by this data, US Treasury yields fell across the board, US stock futures strengthened, and rate markets dramatically scaled back pricing for a Fed rate hike in October.

According to CME FedWatch tool, after the data release, traders’ probability expectations for a Fed rate hike at the October meeting dropped from 22% to 17%, and the cumulative hike premium for the remaining two meetings this year fell to about 21 basis points.

The US 2-year Treasury yield fell about 10 basis points in a single day, reaching 4.69%. S&P 500 index futures rose 0.8%, and Nasdaq 100 index futures increased by as much as 1.1%.

Economists generally believe that the unusual weakness in September employment data likely stemmed mainly from distortions in seasonal adjustment factors rather than a substantial shift in the labor market.

According to Reuters, Labor Day this year fell at the end of the month, a situation that historically often leads to lower-than-expected non-farm payroll data. Meanwhile, the seasonal adjustment model used by the government is considered to have both suppressed the September job increase and caused August’s data to be revised down to 133,000—from the previously reported 162,000.

The forecast range for September employment was between 35,000 and 180,000, with the broad dispersion itself reflecting analysts’ expectations for data noise.

The current fundamentals of the labor market remain resilient. Initial claims for unemployment benefits continue to hover near a 57-year low, corporate profits are steady, domestic demand is strong, and there are no signs of large-scale layoffs.

From an industry perspective, the weakness in September employment was mainly dragged down by decreases in jobs in government, information, professional and business services, and financial activities.

Meanwhile, healthcare, construction, and manufacturing continued to achieve net increases in employment, indicating that labor demand in some areas of the real economy remains stable.

According to Bloomberg, the rise in unemployment rate to 4.2% was partly due to the natural expansion of the labor force. Economists estimate that the current economy needs to add 50,000 to 80,000 jobs per month just to keep pace with the growth of the working-age population.

The ongoing wave of retirements and strict immigration controls under the Trump administration have compressed labor supply, which objectively supports a higher unemployment rate.

Economists remain cautious about the outlook for the coming quarters.

The war between the US and Israel against Iran has led to rising energy prices and supply chain tensions, which are expected to begin having a substantial impact on the labor market from the end of this year through 2027. Diesel prices have reached record highs, and potential transmission pressure is gradually spreading to sectors beyond transportation and agriculture.

Additionally, ongoing tariff disputes are also making companies uneasy. A survey released Thursday by the Institute for Supply Management (ISM) showed manufacturers’ concerns over trade disputes with Canada continue to intensify, which may further dampen firms’ willingness to expand production and hire.

Before the release of employment data, the Fed last month raised the benchmark overnight rate by 25 basis points to a range of 3.75% to 4.00%—the first rate hike in three years—and signaled further tightening.

However, both July and August inflation data came in below expectations, already causing the probability of another rate hike in October to fall.

This week, several Fed officials, including Vice Chair Jefferson and New York Fed President Williams, have begun to downplay some market expectations, stating that officials can wait and observe economic data before taking the next step.

Meanwhile, Dallas Fed President Lorie Logan stated that in order to curb inflation, the Fed still needs to further raise interest rates, but higher US Treasury yields might also help slow the economy.

According to CME FedWatch tool, prior to the employment report, markets were pricing about a 22% chance of a Fed rate hike at the October 27-28 meeting, down significantly from about 69% a week ago. After the September employment data was released, this probability fell further to around 17%, and the market is no longer fully pricing in a rate hike before year-end.