EDTK

Futures markets are currently pricing in nearly an 80% probability of a Federal Reserve rate hike at its next meeting, making the October employment report a critical moment.

The report could significantly affect market views on the Federal Reserve's policy path, at least until the November employment report is released in early December. Strong employment data would allow the Federal Reserve to focus more on its inflation-control mandate and could also mean the market needs to reassess expectations for two additional rate hikes.

The market expects Friday's October employment report will not be particularly strong, although the number of jobs added each month had continued to decline over the past year. Clearly, the slowdown seen before the autumn of 2025 has now passed, and employment growth has resumed, albeit at a more moderate pace.

Analysts forecast that October nonfarm payrolls will increase by 65,000, above September's 29,000, while the unemployment rate is expected to remain unchanged at 4.2%. Wage growth is projected to rise 0.3% MoM, higher than the previous 0.1%, while increasing 2.9% YoY, below the previous 3.0%. Average weekly working hours are expected to remain unchanged at 34.4 hours.

A potentially better reflection of labor market health is the Indexes of Aggregate Weekly Payrolls of All Employees. The index appears to have stabilized after bottoming in December 2025 and has been growing at a steady pace, indicating that the slowdown in the labor market and wage growth has stabilized.

Therefore, although overall wage growth and job additions have slowed, growth remains consistent with pre-pandemic labor market conditions, when annual growth ranged between 4% and 5%. The issue is that persistently high inflation is eroding real wages, meaning the Federal Reserve needs to focus more on its inflation mandate.

This implies that unless the employment report shows a sharp rise in unemployment or an unexpected decline in job creation, market views on the Federal Reserve's policy path are unlikely to change significantly.

What could alter market expectations for rate hikes would be data that significantly exceeds expectations and is accompanied by a notable decline in the unemployment rate. This could raise the probability of a December rate hike and, more importantly, could lead the market to bring forward expectations for future hikes and even increase the expected number of hikes.

The market currently expects one rate hike in December and another in 2027, while also expecting the rate hike cycle to end in 2027. Although another employment report will be released in early December before the Federal Reserve meeting, a strong October report would strengthen the case for further policy tightening, while an equally strong November report could prompt concerns that rate hikes may exceed two increases.