Weak US Jobs Ease Fed Hike Bets (5 – 9 October)

Weak US labor market data shifted the monetary policy outlook after September nonfarm payrolls rose by only 29,000, well below the 90,000 forecast, while prior months were revised lower. Unemployment rose to 4.2%, and wage growth slowed to 3.0%, cutting the probability of an October Fed hike to around 20%. The Dollar Index fell below 102 after the report, but remained on course for a third consecutive weekly gain.

Middle East tensions continued to influence energy and inflation expectations. Brent traded around $102 as the US reportedly increased its military presence in the region and China reduced October fuel exports. However, Gulf crude flows approaching prewar levels and plans by G7 countries to release up to 100 million barrels limited the rally. In Europe, inflation continued to accelerate, supporting expectations for further ECB tightening despite concerns over French fiscal conditions.

Market Drivers & Catalysts

• US Jobs Disappoint: September payrolls increased by only 29,000, compared with the 90,000 forecast, while unemployment rose to 4.2% and wage growth eased to 3.0%.
• Fed Hike Bets Fall: Markets now see roughly a 20% probability of an October hike, although the probability of a December increase remains above 80%.
• Middle East Risks Remain: The US reportedly deployed a third carrier strike group and 2,000 Marines to the Middle East as uncertainty surrounding US-Iran negotiations continued.
• G7 Oil Response: Plans to release as much as 100 million barrels from reserves and recovering Gulf crude flows helped limit oil price gains.
• European Inflation Rises: Eurozone inflation accelerated to 3.8%, while markets continue to expect another 25-basis-point ECB hike by December.

Fixed Income

• US 10-Year Treasury Note Yield: The US 10-year Treasury yield climbed back to 5.52% after initially falling as much as 8 basis points following the weak payroll report. The data reduced expectations for an October Fed hike, although markets continue to anticipate another increase in December. Lower oil prices offered some relief from inflation concerns, while fiscal risks and the unresolved Middle East conflict kept yields elevated.
• UK 10-Year Bond Yield: The UK 10-year gilt yield slipped below 5.4% after reaching its highest level since July 2007. The pause in oil's rally eased some inflation concerns, although BoE officials, including Governor Andrew Bailey, continued to signal openness to further tightening. Markets currently price around 30 basis points of rate increases by year-end, with attention also turning toward the October 28 budget.
• Japan 10-Year Government Bond Yield: Japan's 10-year government bond yield fell below 3.1%, retreating from 30-year highs. Tokyo core inflation reached 2.7% in September, remaining above the BOJ's 2% target. The BOJ's September policy summary indicated another hike could come this year but provided little clarity on timing, while government spending plans and fiscal concerns continued to pressure Japanese bonds.
• Germany 10-Year Bund Yield: Germany's 10-year Bund yield moved below 3.45% after recently reaching a 17-year high. Eurozone inflation accelerated to 3.8%, supporting expectations for additional ECB tightening despite concerns surrounding French fiscal and political conditions. Markets expect another 25-basis-point increase by December and see the deposit rate reaching around 3.4% by late 2027.

Commodities

Gold traded near $4,140 per ounce after weak US employment figures reduced expectations for an immediate Fed hike. September payrolls increased by only 29,000, unemployment rose to 4.2%, and wage growth slowed to 3.0%. October hike expectations fell to around 20%, although markets still see more than an 80% probability of another increase by December.

Silver stabilized around $60 per ounce as weaker US employment data reduced expectations for an October Fed hike. Markets now see only around a 20% probability of an increase this month, although December hike odds remain above 80%. Fed officials Philip Jefferson and John Williams also argued for patience before further tightening.

Currencies

• U.S. Dollar Index (DXY): The Dollar Index fell below 102, ending a four-session winning streak after September payrolls increased by only 29,000 and unemployment climbed to 4.2%. The weaker report reduced expectations for an October Fed hike, while Brent's decline below $100 temporarily eased inflation concerns. Despite the pullback, the dollar remained on track for a third weekly gain.
• Euro: The euro recovered toward $1.126 after previously reaching its lowest level in more than a year. Weak US employment figures supported the rebound, while Eurozone inflation accelerated to 3.8%, its highest since September 2023. However, French fiscal concerns and cautious ECB commentary limited the currency's recovery.
• British Pound: Sterling moved above $1.32, recovering from a three-month low as weak US payroll data increased expectations for a Fed hold in October. Markets currently price in around 30 basis points of BoE tightening by year-end, while Bailey continues to highlight inflation risks.
• Japanese Yen: The yen strengthened slightly below 158 per dollar after Tokyo core inflation accelerated to 2.7% in September, exceeding the BOJ's 2% target. The BOJ's September summary suggested another rate increase remains possible this year, although uncertainty over the timing and elevated US Treasury yields kept the yen on course for a third consecutive weekly decline.

Economic Data Highlights

• US Unemployment: The unemployment rate increased to 4.2% from 4.1%. The number of unemployed rose by 78,000 to 7.11 million, while employment increased by 406,000. Labor force participation climbed to 61.8% from 61.6%, and the U-6 rate eased to 7.6% from 7.7%.
• Germany Inflation: Annual inflation accelerated to 3.3% in September, its highest since December 2023 and above the 3.2% forecast. Energy inflation surged to 14.9%, services inflation eased to 2.7%, and core inflation remained at 2.4%.
• US Job Openings: JOLTS openings declined by 256,000 to 7.079 million in August, their lowest level in five months and below expectations of 7.23 million. Hires remained around 5.2 million, while separations were unchanged at approximately 5.1 million.
• China Manufacturing PMI: China's NBS Manufacturing PMI increased to 50.1 in September from 49.8, marking the first expansion since June. Output growth reached a nine-month high, although employment and foreign orders continued to contract.

Macro Calendar Highlights

• Monday, October 5: US ISM Services PMI and S&P Global Services PMI
• Wednesday, October 7: FOMC Meeting Minutes and US Crude Oil Inventories
• Thursday, October 8: US Initial Jobless Claims
• Friday, October 9: US University of Michigan Consumer Sentiment and Inflation Expectations.