Regional Fed Data Points to a Soft September Payroll Print

• Services and manufacturing surveys show hiring cooled in September.

• That follows on the heels of a hiring surge in August.

• This week’s employment data is likely to remain weaker than seasonality.

The labor market's comeback is looking more like a pause…

This week delivers an important update on the direction of U.S. growth. On Friday, the U.S. Bureau of Labor Statistics (“BLS”) publishes its September payroll report. Wall Street anticipates a gain of 98,000 jobs. If the number lands there, it’ll come in below the typical September increase of 189,000 since 2015. It would also cement another year of below average hiring…

September hiring usually runs below the annual monthly average of 227,000 anyway. And recent Fed business surveys suggest employment nothing changed this past month. That points to a number that could miss Wall Street's already-modest bar, and land well short of typical seasonality.

If the national data echoes that weakness, it tells a familiar story: slow, steady growth, but a labor market that still isn't out of the woods. That's the case for the Fed to stay on hold in October. If it does hike, it should be one and done. That's an outcome that would still support a continued grind higher in the S&P 500.

But don’t take my word for it, let’s look at what the data’s telling us…

Each month, several regional Fed banks survey manufacturing and services firms to gauge business conditions. I focus on the employment and inflation components from the Dallas, Kansas City, New York, and Philadelphia districts.

• They represent roughly one-third of U.S. GDP.

• They’re released ahead of market‑moving reports like the BLS payrolls.

• The surveys offer an early read on national trends.

Today, I’m zeroing in on employment. Let’s break down the individual components before zooming out to the broader picture.

Starting with manufacturing…

• The chart above tracks the sector’s hiring trend over the past seven years.

• After a pullback in January, hiring appears to be stabilizing, but at a softer level.

• My gauge’s reading for September improved compared to August.

The more important services sector painted a weaker picture…

• Hiring slumped, with the gauge barely remaining positive.

• This marked the third consecutive drop after a June rebound.

• New York and Kansas City experienced a contraction in hiring.

To get a cleaner national picture, I combined the manufacturing and services data into a single gauge. It’s weighted 80% services and 20% manufacturing, consistent with the U.S. employment mix. I also weighted each district by its GDP share…

• The overall hiring picture eased once more.

• In September, my combined index fell to 1.3 from 1.7 in August.

• The outcome was much more in-line with the year-to-date average.

Now let’s compare the combined Fed employment gauge with nonfarm payrolls for historical context. The following chart uses a three‑month rolling average to smooth volatility and highlight the trend…

• The combined Fed survey tends to lead national hiring.

• The September gains appear to be distorting the rolling average.

• As those numbers drop out, it’s likely the data turns lower.

Here's the bottom line: manufacturing and services employment showed signs of life this summer, but as I noted back in June, they hadn't fully found their footing. The September survey numbers suggest the hiring picture remains fragile. If Friday's BLS report confirms that, hiring will remain well below historical norms.

That matters for rates. If the jobs number disappoints, Wall Street may need to rethink its recent bet on Fed rate hikes. The Fed is watching inflation closely, but it doesn't want to break the labor market to fight it — raising rates too fast into a softening labor market is a bad trade for growth.

At the end of the day, policymakers may raise rates one time before year's end for credibility purposes. Yet ultimately, if policymakers can remain patient, they may have an opportunity to lower rates once more by the end of 2027. That should help to support economic growth and underpin a continued long-term rally in the S&P 500.

Five Stories Moving the Market:

China's factory activity returned to growth in September, according to a National Bureau of Statistics survey, as easing weather disruptions allowed factories to ​resume operations and a global artificial intelligence boom supported the industrial sector – Reuters. (Why you should care – given China’s manufacturing increasingly relies on robotics, the rebound may not translate to increased domestic consumption and economic growth)

Federal Reserve Bank of New York President John Williams said the central bank could wait until December before raising interest rates again, pushing back against market bets on a follow-up increase next month – WSJ. (Why you should care – Williams, the vice chair of the FOMC, tends to be middle of the road when it comes to monetary policy leanings)

U.S. President Donald Trump endorsed using outside auditors to assess the safety of artificial intelligence systems through an accord with Silicon Valley leaders that seeks to sidestep new government rules in addressing a groundswell of concern over AI risks – Bloomberg. (Why you should care – outside oversight would be the first step in creating a regulatory moat for the large AI companies)

Abu Dhabi’s $300 billion sovereign wealth fund has become central to building the infrastructure needed to override Iran’s stranglehold over the Strait of Hormuz; the fund is now likely to spend tens of billions of dollars on new port infrastructure outside the embattled strait – Bloomberg. (Why you should care – Iran’s push to control the Strait of Hormuz is driving other countries to avoid, eroding Tehran’s leverage in the process)

Crude oil exports from key Middle East producers rebounded in September to 16.3 million barrels per day (bpd), the highest since the US-Israeli war on Iran started in late February, according to Kpler data – Reuters. (Why you should care – the recovery is being driven by a rebound in Strait of Hormuz traffic)

Pre-Market Levels:

S&P Futures +0.05%, Nasdaq Futures -0.04%, Dow Jones Futures +0.01%, Russell 2000 Futures -0.07%

Europe:

EuroStoxx 50 -0.22%, U.K. FTSE +0.12%, German DAX -0.19%, French CAC -0.49%, Italian MIB -0.18%, Spanish IBEX +0.11%

Asia:

Japan's Nikkei +1.94%, Japan's TOPIX +1.43%, China's Shanghai Composite +0.31%, Hong Kong Hang Seng +0.37%, South Korea's KOSPI -0.48%, Taiwan's TSE +0.38%

Currencies:

Dollar -0.16%, Euro +0.10%, Japanese Yen +0.11%, British Pound +0.47%, Canadian Dollar +0.04%, Swedish Krona -0.14%, Swiss Franc -0.20%

Risk:

VIX +0.50%, Bitcoin -0.57%, Ethereum -1.32%

Growth:

WTI Crude +1.44%, Brent Crude +1.60%, Nat Gas +1.03%, Copper +0.30%

Safety:

Gold +1.01%, Silver -0.14%

Sovereign Bonds:

U.S. 10-Year -2.1bps at 5.234%

U.S. 2-Year -1.2bps at 4.877%

German 10-Year -2.7bps at 3.588%

French 10-Year -0.5bps at 4.813%

U.K. 10-Year -0.9bps at 5.406%

Japan 10-Year -0.4bps at 3.062%

Economic Calendar:

Earnings: MU, JBL, FDS

U.K. - GDP for Q2 (Final) (2 a.m.)

U.K. - Nationwide House Prices for September (2 a.m.)

Germany - Retail Sales for August (2 a.m.)

France - CPI for September (2:45 a.m.)

Germany - Unemployment for September (3:55 a.m.)

BoE - Financial Policy Committee Record (5:30 a.m.)

U.S. - MBA Mortgage Applications (7 a.m.)

Germany - CPI for September (8 a.m.)

U.S. - ADP Employment Change for September (8:15 a.m.)

U.S. - GDP for Q2 (Third Estimate) (8:30 a.m.)

U.S. - Personal Income and Spending for August (8:30 a.m.)

U.S. - PCE Price Index for August (8:30 a.m.)

U.S. - Advance Goods Trade Balance for August (8:30 a.m.)

U.S. - Advance Wholesale and Retail Inventories for August (8:30 a.m.)

U.S. - Chicago PMI for September (9:45 a.m.)

U.S. - Energy Information Administration Crude Oil Inventory Data (10:30 a.m.)

ECB's Schnabel (Executive Board Member) Speaks (11:45 a.m.)

Fed's Barkin (Richmond, Non-Voter) Speaks (1:30 p.m.)

Fed's Cook (Board, Voter) Speaks (3:25 p.m.)

Fed's Goolsbee (Chicago, Non-Voter) Speaks (5:10 p.m.)

Fed's Kashkari (Minneapolis, Voter) Speaks (6 p.m.)

Japan - Tankan Large Manufacturers Index for Q3 (7:50 p.m.)

BOJ - Summary of Opinions (7:50 p.m.)

South Korea - Exports for September (8 p.m.)

Japan - Manufacturing PMI for September (Final) (8:30 p.m.)

Australia - Trade Balance for August (9:30 p.m.)