September payrolls grew by 110K from a revised 89, the unemployment rate remained steady at 4.7% and average hourly earnings edge dup to 0.4% from 0.3%.

We do not place much emphasis on the sharp upward revision in September payrolls from -4K to +89K, 94% of which came from government jobs (84K upward revision). Without the government revision, August payrolls would have come out at +5K instead of -4K.

Equally important, losses persisted in manufacturing (-18K from -45K) and construction (-14K from -22K), while retail jobs went in the red at 5K after a creation of 9K jobs in August. Total creation in services jobs slowed to 143k from 153K.

Implications for the Fed

Although Friday's employment report diminishes chances of an October rate cut--which stood at nearly 75% before the release-- it is early in the month to decide on the outcome of the Oct 31st announcement. At this juncture, we expect a 50% chance for a 25-bp rate cut. The fact that payrolls remain below their 3-month average throughout the year and that construction and manufacturing employment continue to shed losses suggests that the downside risks to the US consumer have not eased. The report may not signal the urgency of the August figures (mainly due to the rebound in government jobs), but it does reflect broad weakness in jobs. This week’s announced layoffs in US banks will not improve the situation. Finally, the case for further Fed easing remains palpable in the broad weakness in US housing.

FX Implications

The report is in line with our expectation for further modest retreat in the EURUSD towards the 1.4050s and a rebound in USDJPY towards the 117.20s, but it does not alter the medium -term bearish picture for the US dollar, as foreign central banks (ECB, UK, Japan, Canada, Australia, New Zealand and Japan) are expected to maintain rates on hold into the rest of the year. The Bank of England is the only central bank with a 60% probability of easing before year-end.