October jobs report is uglier than economists expected

• With the unemployment rate steady at 4.1% last month, it remains a strong labor market overall. That's the lowest unemployment rate heading into a presidential election since 2000.
• But the direction of change in the labor market is not great.

What they're saying: "[Friday's] weaker-than-expected jobs report not only reflected the effects of storms and strikes, but also of the continued labor market cooldown," ZipRecruiter chief economist Julia Pollak wrote in a note.

• "The report is broadly consistent with the big picture that has emerged over the past two years: a labor market that is growing but slowing, and where growth is increasingly narrowly concentrated."

By the numbers: Payrolls were effectively flat in October with a gain of just 12,000 jobs (in an economy with total employment of 159 million!).

• The Labor Department said its survey of establishments — the raw material for payrolls numbers — was distorted by hurricane effects, as well as an unusually tight window for employers to respond to the department's surveys.
• The impact of striking workers at Boeing was also apparent: The manufacturing sector shed 46,000 jobs, of which 44,000 were in the transportation equipment sector. That should rebound once union workers strike a deal with the company (which may be imminent).

Yes, but: Other aspects of the report that should be unaffected by the hurricanes or strikes offered hints of weakness.

• Revisions to payrolls numbers subtracted 112,000 positions from August and September job growth.
• The headline unemployment rate actually did tick up slightly if you go out an extra decimal place, moving from 4.05% in September to 4.14% in October.
• The details underneath the jobless rate were weak, with 428,000 more people reported as being not in the labor force, and the share of the adult population employed falling by 0.2 percentage points.

Between the lines: The household survey, on which the unemployment rate is based, is notoriously volatile. But its softness can't be ignored, particularly given that it has shown a meaningful upward move in joblessness since the start of the year.

• It's always dangerous to read too much into one month's numbers, and that's all the more so with one-off distortions in October. But to the degree that there are meaningful signals, they aren't particularly positive.

That leaves the Fed on track to cut interest rates next week, as it seeks to adjust policy to match changing economic circumstances.

State of play: The soft jobs numbers cement what already looked likely — a second consecutive interest rate cut at a policy meeting that concludes Thursday. This, however, is likely to be a quarter-point cut, in contrast to the supersized half-point reduction in rates in September.

• The CME FedWatch tool, based on futures markets, on Friday placed 98.1% odds on a quarter-point cut next week, up from 95% Thursday.

Of note: There are some warning signs in both Friday morning's report and recent bond market activity that inflation may not be entirely subdued in the coming months — which would also point toward the Fed moving cautiously in cutting rates.

• Average hourly earnings rose 0.4% in October and ticked up to 4% over the last 12 months, which could raise alarm bells about continued wage inflation.
• Those numbers could also be distorted by the hurricanes, if low-wage workers were disproportionately left off of payrolls.

The prices of inflation-protected bonds have moved in recent weeks in ways that imply somewhat higher inflation ahead.

• Inflation of 2.38% per year over the next five years was priced into bond markets Friday morning, up from 1.95% in late September. Markets are baking in somewhat more elevated inflation than they were a few weeks ago.

The bottom line: The softer jobs numbers are enough to solidify the Fed's immediate rate-cutting plans, but what comes after that is harder to predict.