October jobs report beats forecasts, lifting December Fed hike odds

The October jobs report from the Bureau of Labor Statistics showed U.S. employers added 165,000 positions last month, nearly triple what economists expected, while the unemployment rate slipped to 4.1%.

The data released Friday, strengthens the case for the Federal Reserve to raise interest rates again when policymakers meet Dec. 8-9.

Economists surveyed by Dow Jones had projected payroll growth of 59,000 and a jobless rate of 4.2%.

Revisions to previous months' numbers added to the upside. August’s gain now stands at 186,000, up 53,000 from the earlier estimate, and September was lifted by 31,000 to 60,000, flipping from the initial 29,000 print that missed expectations and gave the Fed cover to hold in October.

Read more: Fed issues hawkish pre-midterm October rate hold

Wages also ran ahead of forecasts. Average hourly earnings rose 0.4% for the month and 3.1% from a year earlier, compared with expectations of 0.3% and 2.9%.

Health care had carried much of the hiring load in recent months, but it ranked second in October with 42,000 jobs. Professional and business services led all sectors at 70,000. Transportation and warehousing contributed 25,000, and manufacturing added 19,000.

The Fed raised its benchmark rate at its September meeting and then held it at 3.75% to 4% on Oct. 28. Chair Kevin Warsh has repeatedly kept the door open to further rate hikes while inflation runs above the central bank’s 2% target.

Futures markets moved quickly after the release. CME Group’s FedWatch tool put the probability of a quarter-point December increase at 76.8%, though it priced only one additional hike beyond that.

Expectations for 2027 tightening had softened earlier in the week following midterm elections that handed Democrats control of both chambers of Congress, and a Thursday selloff in technology shares.

Read more: Nasdaq enters correction as AI stocks sink after midterm elections

The positive surprise in employment numbers moved fixed income markets. The yield on the 10-year Treasury went up more than 3 basis points to roughly 4.87%, while the longer-tenored 30-year Treasury yield went up to around 5.28%. On the other end of the curve, the 2-year Treasury note leapt nearly 5 basis points to 4.52%.

Jeff Schulze, head investment strategist at Franklin Templeton Institute, said lower unemployment in October gives the Fed more license to be hawkish as it “leaves the committee free to continue placing the majority of its focus on restoring price stability.”

Addison Maier, a portfolio manager at Janus Henderson Investors, said the “unambiguously strong jobs report” means Fed officials can focus more on the inflation side of the central bank's dual mandate, while also weighing the ramifications of AI.

"“While this release points towards a December hike which is ~75% priced, on a forward-looking basis, especially in light of the volatility this week, what will matter most for the Fed is inflation and the evolving outlook for the AI buildout,” he said.

Chris Zaccarelli, chief investment officer at Northlight Asset Management, argued that the economy can withstand both higher oil prices and higher rates, citing GDP growth of 3.4% and corporate earnings up more than 25% from a year earlier.

“Trees don’t grow to the sky and of course there is a limit to how high interest rates can go before something breaks,” he said, downplaying recent market moves as "day-to-day knee jerk reaction to changing narratives.

"As someone much smarter than me said “In the short run the market is a voting machine, but in the long run it is a weighing machine” and we always keep that in mind as we navigate times like these," he said.