U.S. non-farm payrolls surge by 165,000 in October, far exceeding expectations! Unemployment rate unexpectedly drops to 4.1%, December rate hike expectations intensify

U.S. nonfarm payroll data for October exceeded expectations across the board, with the labor market displaying strong resilience. This has sharply increased market bets on a possible interest rate hike by the Federal Reserve in December.

The U.S. Bureau of Labor Statistics reported on Friday that nonfarm payrolls rose by 165,000 in October, the third highest reading since 2026. This not only far surpassed Wall Street's median forecast of 65,000, but also exceeded the upper limit of forecasts from all institutions—a roughly five-standard deviation upside surprise.

Meanwhile, the unemployment rate unexpectedly fell from 4.2% to 4.1%, and average hourly earnings growth accelerated year-on-year to 3.1%.

Following the data release, U.S. Treasuries were sold off, with the 2-year yield rising by as much as 7 basis points to 4.54% and the 10-year yield climbing to 4.87%. The interest rate futures market immediately priced in a 70% chance of a rate hike in December, with markets expecting the Federal Reserve to tighten by at least another 40 basis points by September 2027.

Federal Reserve Chair Walsh said last week that the employment situation was "pretty normal." The latest data is likely to further reinforce the Fed’s inflation-focused policy stance.

The October jobs gain of 165,000 marked the third-highest monthly increase so far this year. Previous months’ data were also sharply revised upward, further highlighting the labor market’s strength.

Specifically, August nonfarm payrolls were revised up from +133,000 to +186,000, a net upward revision of 53,000; September was revised from +29,000 to +60,000, a net upward revision of 31,000. In total, the past two months’ figures were revised up by 84,000, indicating that previous market estimates of labor market cooling were significantly underestimated.

From an industry perspective, the employment growth this time was broad-based.

The health care and social assistance sector added about 55,000 jobs, the highest in six months, continuing to be the main engine for job growth in recent years; professional and business services and manufacturing also saw significant gains. Overall, private sector job growth was the strongest since March this year.

Against the backdrop of rapid AI adoption, the internal structure of the labor market is showing clear divergence.

Ongoing demand for data center construction and AI-related infrastructure investment continues to support employment in the construction and manufacturing industries. Non-residential building employment has continued to grow, offsetting the drag from the residential building sector. Within manufacturing, employment in the computer and electronic products segment saw the largest increase in nearly four years.

Meanwhile, in sectors such as information and financial activities, which have high AI adoption rates, employment appears to be stabilizing.

Goldman Sachs economists noted in a report this week that "the impact of AI on the labor market has become increasingly evident in recent months." In non-manufacturing sectors, industries with higher AI adoption rates have seen weaker employment growth and correspondingly higher unemployment rates.

Wage data also surprised to the upside, but whether pay gains can outpace inflation remains an unresolved question.

In October, average hourly earnings rose by 0.4% month-on-month, above market expectations of 0.3% and marking the largest monthly increase since November 2025. Year-on-year growth edged down slightly from a revised 3.2% in the previous month to 3.1%, but remained above the sub-3.0% expected by markets.

Notably, the labor force participation rate rose to 61.9%, its highest level since March this year; however, the broad unemployment rate also rose, as the number of people forced into part-time work for economic reasons hit a six-month high.

In addition, the median duration of unemployment climbed to 11.9 weeks, the longest since 2021, indicating continued employment friction for some job seekers. While nominal wages are accelerating, actual purchasing power has not kept pace amid persistently high inflation. This also reflects voter sentiment during this midterm election period.

Strong jobs data directly impacted the fixed-income market and reshaped market expectations for the Fed’s policy trajectory.

After the data was released, U.S. Treasury prices fell across the board. The rate-sensitive 2-year yield rose to 4.54%, and the 10-year yield climbed to 4.87%.

Interest rate swaps show traders now assign a 70% probability to a December rate hike, and expect the Federal Reserve to hike rates by at least another 40 basis points before September 2027.

Federal Reserve officials will see another nonfarm payrolls report and a series of inflation releases before the December meeting.

Before this, officials including Walsh, Hammack, and Barkin had made it clear that the jobs market remains robust and that the current focus is on tackling inflation. The stronger-than-expected jobs data provides ample justification for taking action at the December meeting.