With the U.S. government shutdown still clouding official labor statistics, alternative data from private firms and banks is sending a clear message: the labor market is cooling, and markets are betting big that the Federal Reserve will respond with another rate cut at its Oct. 30 meeting.

The absence of the September jobs report from the Bureau of Labor Statistics due to the shutdown has left investors and policymakers in the dark.

The last official nonfarm payroll figure—just 22,000 jobs added in August—already signaled stagnation, with the three-month average stuck around 29,000.

Private Payrolls Show Job Losses In September

In lieu of public data, private sources are painting a troubling picture.

The ADP payrolls report released last week showed private employers cut 32,000 jobs in September. That follows a downward revision for August to a 3,000 job loss and marks the sharpest decline since March 2023. Economists had expected a 50,000 gain.

It's also the first time since 2020 that the private sector has posted two consecutive months of job losses, a red flag for an economy that had seemed resilient just months ago.

Meanwhile, the Institute for Supply Management's Services Purchasing Managers Index (ISM Services PMI), a key forward-looking indicator, showed the employment sub-index contracting for the fourth straight month—and five of the last six.

“Data from sources outside the federal government are still coming out, and paint a downbeat picture of the economy at the end of the second quarter,” said Bill Adams, chief economist at Comerica Bank.

Bank of America Data Supports A Labor Market Weakness

Internal data from the Bank of America Institute further confirms a cooling job market. In a report published Wednesday, the bank said employment growth slowed in September, while unemployment claims rose.

"Our payroll estimates—based on direct deposit data—suggest a continued slowdown," the bank said, noting that payroll growth rose just 0.5% year-over-year in September, the slowest pace in months.

Unemployment payments into BofA accounts also point to worsening conditions.

In October, those payments rose 10% from the previous year, double the 5% year-over-year increase reported by the BLS in August. That divergence, the bank said, "suggests some upward momentum to unemployment."

Despite the weakness in hiring, pay growth did see some acceleration across income groups. After-tax wage and salary payments rose 4.0% year-over-year in September for higher-income households, 2.4% for middle-income and just 1.4% for lower-income families.

While the gap between cohorts did not widen further in September, the disparity remains stark, underlining persistent inequality in wage growth.

Markets Strongly Bet On Rate Cut

With no hard federal data to counter the downbeat private reports, markets are treating another rate cut from the Fed as a done deal.

According to CME FedWatch, futures imply a 95% probability of a 25-basis-point cut on Oct. 30, which would lower the fed funds target range to 3.75%-4.00%.

That would follow the September cut, and markets are also pricing in a third cut in December with 80% odds.

"For the Fed, this fuzzier-than-usual read on the economy is negative enough to very likely prompt a cut to the federal funds target at their next decision," Adams said.

With Washington's shutdown halting official reports, private data is stepping in—and it's painting a clear picture: job growth is stalling, unemployment is ticking higher, and broader economic signals are flashing red just as the Federal Reserve prepares its next policy move.

Still, Wall Street is rallying on optimism that softer data will prompt the Fed to consider another rate cut. The Nasdaq 100, tracked by Invesco QQQ Trust , rose 0.6% Wednesday, trading within 0.2% of its record high from the day before and now up 50% since hitting bottom in April.

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