Futures price only about a one-in-six chance of an October rate increase after September's weak payrolls. This week brings the ISM services survey, minutes from the September hike, a run of Fed speakers and three Treasury auctions.
The Federal Reserve raised rates in September. Three weeks later, the labor market data have made the case for doing it again in October much harder to argue.
U.S. employers added just 29,000 jobs in September, and revisions subtracted 60,000 from the prior two months, so the economy has netted fewer jobs over the past three reports than the headline totals initially suggested. The unemployment rate rose to 4.2%.
Markets have adjusted. Prediction market pricing puts the probability of a quarter-point increase at the Oct. 27 to 28 meeting at about 17%. That is equivalent to roughly 4 basis points of tightening priced into the decision, a small hedge rather than a forecast. The policy rate sits in a range of 3.75% to 4.00% after the Sept. 16 increase.
The hawks are still talking
Some officials have not given up on more tightening. Dallas Fed President Lorie Logan has said rates need to rise by at least another half point. Governor Michelle Bowman has signaled no urgency. New York Fed President John Williams, Bowman and Logan are all scheduled to speak on Tuesday, giving investors a chance to see whether the jobs data have moved the hawks.
The minutes of the September meeting, due Wednesday at 2 p.m. Eastern, will show how broad the support for that hike was and whether officials anticipated further moves.
The political noise
The White House added pressure from another direction. Kevin Hassett, director of the National Economic Council, said in a Sunday television interview that former Chair Jerome Powell should "move on" from the Fed's board, following an internal watchdog report on the renovation of the central bank's headquarters. Powell remains a governor and a voting member of the policy committee.
Bonds are not cooperating
The softer jobs data have not delivered relief at the long end. The 10-year Treasury yield stood near 5.26% early Monday, a level that keeps mortgage rates and corporate borrowing costs elevated. That combination, weak hiring with high long-term rates, is the central problem for the Fed: the short end prices a pause while the long end prices term premium and inflation risk.
Supply will test that this week. The Treasury sells three-year notes on Tuesday, 10-year notes on Wednesday and 30-year bonds on Thursday.
The services check
Monday's ISM services index, due at 10 a.m., is the next test. Economists expect a reading of 55.1, which would signal continued expansion. The prices component is the more important figure for the rate debate. Manufacturing firms reported input prices at 77.9 last week, and a similarly hot services reading would revive the inflation argument that weak payrolls have muted.
What to watch: The ISM services prices index on Monday and the tone of Wednesday's minutes. A services price reading near the manufacturing level, paired with minutes that show broad support for further increases, would push October hike odds back toward one in three. Consumer prices on Oct. 14 come next.