CONTRIBUTORS
Nikhil Mohan
Economist
Franklin Templeton Fixed Income
The stronger-than-expected October US employment report challenged the emerging narrative of a weakening labor market and strengthened the case for another Federal Reserve (Fed) hike in December. Payrolls increased 165,000, significantly above expectations of approximately 60,000, while revisions added another 84,000 jobs to August and September. The three-month average improved to 137,000, and unemployment edged down to 4.1% (-0.1 percentage point [pp]), even as the participation rate rose to 61.9% (+0.1 pp). The breadth of job gains also saw an improvement, with stronger job gains outside of the health care sector. Initial jobless claims also remained exceptionally low at around 189,000. Meanwhile, September’s job openings, hires and quits all improved at the margin while layoffs stayed very low. At 7.52 million and the highest since May, job openings have recovered to around pre-pandemic norms. Openings per unemployed worker were about 1.06, also well below the 2022 peak but broadly consistent with a labor market that is no longer especially tight. While hiring did improve, it remains subdued compared with the stronger turnover environment of 2021–2022 and is much closer to the relatively soft pace seen over the past couple of years.
Breadth of Job Gains Turned Broader
2024-2026
One-Month Change
Sources: BLS, Macrobond. Analysis by Franklin Templeton Fixed Income. As of November 9, 2026. NFP = non-farm payrolls.
The Job Openings and Labor Turnover Survey report therefore points to firmer labor demand without a return to the unusually tight, high-turnover labor market of 2021–2022, while also corroborating rather than contradicting the stronger payroll signal. Importantly, average hourly earnings increased by a solid 0.4% month-over-month (m/m), with September also seeing a material upward revision. However, year- over-year wage growth remained relatively contained at 3.1%. Production and nonsupervisory wages also rose 0.4% m/m, suggesting the strength was not confined to higher-paid workers.
Business activity also remained resilient, as manufacturing provided the more encouraging signal. The October Institute for Supply Management (ISM) manufacturing index increased to 55.5 from 54.5, its 10th consecutive month of expansion, with both production and new orders strengthening further. Services activity moderated slightly to 54.5 from 54.9 as new orders eased, but both sectors continued expanding. The more concerning development was the persistence of input-cost pressures. The combination of improving manufacturing activity and persistent price pressures reinforces the risk that stronger growth will make disinflation more difficult.
Expansion Still at an Inflationary Pace
2023-2026
ISM Manufacturing
Sources: ISM, Macrobond. Analysis by Franklin Templeton Fixed Income. As of November 9, 2026.
Democrats securing control of both the House and Senate substantially reduces the likelihood of further Republican-led fiscal legislation and raises the prospect of greater congressional scrutiny of tariff policy, spending priorities and the administration's broader economic agenda. However, Democratic control does not automatically translate into fiscal expansion (though that would likely be the direction of travel) or tariff reductions. Proposals to reverse Medicaid spending reductions, extend Affordable Care Act subsidies or modify State and Local Tax provisions would still require presidential approval or a veto-proof majority (two-thirds majority in both chambers. Similarly, reducing existing tariffs may require legislation that limits authority that Congress had previously delegated to the executive. The near-term implication is greater policy gridlock rather than an immediate fiscal impulse, although budget negotiations and the next debt-ceiling debate could become more contentious.
The Fed's December interest-rate decision has become more finely balanced, although the latest data strengthen the case for another 25-basis-point hike. The October Federal Open Market Committee had already acknowledged stronger economic activity while maintaining its concern about elevated inflation. Last week's payrolls and manufacturing data reinforce that assessment, while persistent input-cost pressures suggest inflation risks remain significant. Following the employment report, futures markets assigned approximately 75%–80% probability to a December hike. Although the Fed minutes do show that some officials may want further evidence of persistent inflation before acting, we maintain our base case for a December hike.
US Treasuries extended their rally despite the stronger labor-market data, while the quarterly refunding announcement provided some reassurance on near-term coupon supply. The absence of a significant immediate coupon-supply shock is supportive for duration, but elevated borrowing requirements and fiscal uncertainty will likely continue to constrain the scope for a sustained long-end rally.
|
Treasury |
October 30 |
High During Week |
November 6 |
Weekly Change Basis Points (bp) |
|
2-Year |
4.56% |
4.61% |
4.51% |
-5 bp |
|
10-Year |
4.94% |
4.95% |
4.86% |
-8 bp |
|
30-Year |
5.31% |
5.32% |
5.26% |
-5 bp |
Source: Bloomberg. As of November 9, 2026.
The US Dollar (USD) strengthened last week, supported by Friday's payroll report, reinforced expectations of another Fed hike and renewed risk aversion, despite the decline in Treasury yields. The dollar also benefited from defensive demand amid the technology-sector correction. We maintain our modestly constructive tactical USD view, supported by US growth outperformance and relatively elevated yields, while recognizing that further declines in US real yields or a more pronounced correction in artificial intelligence-related equities could limit appreciation.
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