Flash Insights: Labor Resilience, Inflation Risks Persist

Stronger US labor demand and persistent cost pressures support another Federal Reserve rate hike in December while limiting the scope for a sustained Treasury rally.

• October payrolls rose by 165,000 against expectations of about 60,000, while revisions added 84,000 jobs to August and September; unemployment fell to 4.1% as participation rose to 61.9%.
• Job openings reached 7.52 million in September, or 1.06 openings per unemployed worker, while initial claims remained near 189,000 and hiring stayed below the high-turnover pace of 2021 to 2022.
• Average hourly earnings increased 0.4% month over month, although annual wage growth remained at 3.1%, and gains also reached production and nonsupervisory workers.
• The ISM manufacturing index rose to 55.5 in October for its tenth consecutive month of expansion, while services remained in expansion at 54.5 and input-cost pressures persisted.
• Futures markets priced a 75% to 80% probability of a December hike; Treasury yields fell by 5 basis points for the 2-year and 30-year maturities and 8 basis points for the 10-year maturity between October 30 and November 6.

Takeaway: Franklin Templeton maintains its base case for a 25-basis-point December hike and a modestly constructive tactical USD view, while fiscal uncertainty and high borrowing needs constrain long-duration bonds and weaker real yields or an AI equity correction could limit dollar gains.