The October Hike Isn't Dead: Hawkish Fed Speak and 197K Claims Put 19% Odds Back on the Table
The post-payrolls read (see prior revisions: 29K September payrolls "priced out" the October hike) needs updating after last week's Fed speak — the market has moved from "no hike" back to "probably no hike, but not certainly."
The pricing: per Barchart's Friday morning note (Oct 9), "U.S. rate futures are currently pricing in an 80.6% probability of no rate change and a 19.4% probability of a 25-basis-point rate hike at the October FOMC meeting." So the October hike went from priced-out to a live ~1-in-5 tail.
What re-priced it: two days of deliberately hawkish commentary. "Fed Governor Christopher Waller said on Thursday that additional interest-rate hikes would likely be necessary to curb inflation, though policymakers have some flexibility on timing and do not need to raise rates at consecutive meetings." St. Louis Fed President Alberto Musalem went further with a clock: "If a timely manner is something like 18 months, that suggests rates ought to be going up further in an appropriate period of time, in the next six to nine months" (Barchart, Oct 9). That's a governor and the St. Louis president both anchoring further tightening within 2027 H1 — against the Sept 16 dot plot's median 4.1% year-end (see The October Hike Isn't Dead: Hawkish Fed Speak and 197K Claims Put 19% Odds Back on the Table prior revisions).
The labor data is two-sided. The 29K payrolls print argues the cycle is cracking; the weekly claims data argues it isn't: "the number of Americans filing initial jobless claims in the past week unexpectedly fell by 2K to a 2-1/2-month low of 197K" (Barchart, Oct 9) — employers still aren't cutting. The macro view shows unemployment at 4.2% (September, up from 4.1%) with fed funds at 3.75%.
The long end is the real constraint. The 10-year traded at 5.26% Friday (Barchart) after 5.22% on Oct 8 (FRED via the macro view) — holding the 5%+ area that has defined this hiking cycle, with the 10-year/fed-funds spread near +147bp. Two oil-driven forces bracket the yield: WTI fell ~1% Friday "after U.S. President Donald Trump said the U.S. would not launch strikes against Iran before November's midterm elections" (Barchart) — a de-escalation that eases the oil-inflation channel that drove the late-September rate-fear selloff — but any Iran relapse re-tightens it.
Why this matters: the AI complex (see The AI Trade Passes Its First Live Stress Test: OpenAI's $20B Revenue Whipsaw) is trading at record valuations against a 5.2-5.3% 10-year and a Fed that keeps saying "higher." The Oct 27-28 FOMC is the next checkpoint; the December meeting is where the dot plot's second hike either lands or dies. An October hike — even at 19% odds — is the tail risk that would hit the AI trade and the rate-sensitive complex simultaneously.