The Economy — Digest
TL;DR
The October hike is dead — CME FedWatch has it at 17%, Kalshi at 18%, down from nearly 70% a week ago — and the live question moved to December, where a hike still prices above 75% on FedWatch. The September payrolls report (+29K, with July revised to an outright loss) is the evidence base for a fast-consolidating patience chorus, and Goldman formally moved its second-hike call to December while flagging "a strong chance" the FOMC concludes it's done. The next gate is September CPI on Oct 14.
October is finished; December is the meeting that has to survive two inflation prints
The post-payrolls repricing completed the job this digest's predecessor described: the hike odds collapsed, and the sell side fell in line. Per CNBC, CME FedWatch shows a 17% chance of a 25bp hike at the Oct 27–28 meeting, with Kalshi at 18% — versus almost 70% a week ago — while December prices above 75% on FedWatch and 65% on Kalshi (Fed odds). Goldman Sachs made it official on Oct 1:
"We are pushing back the second hike in our forecast to December, and we see a strong chance that the FOMC will ultimately conclude that additional rate hikes are unnecessary." — Goldman Sachs, via Reuters
The sequencing matters: Williams (Sept 29) and Jefferson both signaled "time to weigh the data" before the payrolls print even landed, so the weak jobs number didn't create the patience case — it confirmed it. Lazard's Ronald Temple keeps the counterweight alive: "two more months of inflation data will arrive before the December meeting, keeping a later hike firmly on the table" (Fed odds). Markets closed the week risk-on anyway — S&P 500 at 7,722.72, about 1.2% below its 52-week high — with the 10-year dipping to ~5.18% on the print after touching ~5.34% Thursday, its highest since 2002.
What to watch: September CPI on Oct 14 — a hot core print revives the hawks; a soft one likely kills the year-end hike outright.
The revisions gutted the data foundation the September hike was built on
The +29K headline is the least important part of the report. The BLS cut July from +21,000 to a net loss of 10,000 — the first outright monthly contraction in more than a year — and August from 162,000 to 133,000, a combined –60,000 jobs across the two months whose initial prints pushed October hike odds from 49% to 65% ahead of the Fed's September 16 hike (payrolls). The Fed hiked into a labor market materially weaker than its real-time data showed.
The breadth signal is what makes this hard to dismiss as one soft month:
The private payroll diffusion index fell back below 50 — more of the ~250 private industries shed jobs than added them. BLS research associates a persistently sub-50 diffusion with business-cycle turning points: it precedes, rather than accompanies, labor contractions. — payrolls finding
Other composition details reinforce the pre-contraction read: unemployment ticked up to 4.2% on re-entrants rather than layoffs, wages rose just +0.1% m/m (+3.0% y/y — barely treading water against inflation), and financial activities shed another 7,000 jobs, now 129,000 below its May 2025 peak across 16 straight months of decline. The 12-month payroll average is down to roughly 45K/month. Vanguard's line is the patience case in miniature: the labor market "has not deteriorated sharply, but there is also little evidence that it has meaningfully strengthened" (Fed odds).
What to watch: the Nov 6 payrolls — whether the diffusion index stays sub-50 turns a soft-landing narrative into a turn-point one.
What surprised us
- The September hike is now a data-integrity problem, not just a policy dispute. The –60K revision landed on the exact months that justified it. If the Fed's real-time data was off by that much, the case for patience isn't just about the economy slowing — it's about whether the committee can trust what it's seeing at all.
- The household survey diverged again — 406,000 more Americans reported employment in September even as establishment payrolls crawled. History says the establishment survey wins these fights, but the gap adds to the "pinball machine" (Gerald Storch's phrase) quality of the data.
- Goldman's "strong chance they're done" is a bigger call than the December push. Most coverage reads it as a timing change; the actual sentence concedes the hiking cycle may be over entirely — a striking shift from a bank that was still carrying a second hike a week ago.
- Risk-on into a 5%+ 10-year. The S&P closed within 1.2% of its high the same week the yield touched a 2002-era peak. Equities are still refusing to price the rates regime bonds are living in.
Open threads worth a vote
- The September CPI thread is the one that matters: Oct 14, 8:30am ET, the decisive input for December. Goldman sees a "strong chance" the FOMC concludes it's done; Lazard says two prints land before the meeting. A hot core revives the hawks — worth a steer on how you'd weight a core surprise.