Weak Payrolls Sends Stocks Higher

MACRO FRAME

US economic data this week (PMI, payrolls), paired with a host of Fed speakers is likely to significantly shape the near-term outlook for the Fed.

STOCK INDEX FUTURES

Equity index futures are sharply higher following September’s nonfarm payrolls data, which fell well-below expectations at 29,000. This figure is also well below the 45,000 average monthly gain over the preceding 12 months, and BLS characterized employment as little changed across all major industries. The prior two months were revised down by a combined 60,000, with July now showing a 10,000 job loss and August reduced to a 133,000 gain. For the Fed, the report weak hiring, downward revisions, yet stable unemployment, labor utilization, and participation argue against interpreting the data as evidence of a sharp deterioration in labor demand. The report should support policy patience and a somewhat easier front-end rates bias, while the ultimate policy signal will depend on whether weak payroll growth is confirmed by further deterioration in the October employment data and by the next inflation releases.

Watch point: Despite tech volatility, the earnings backdrop suggests bullishness, despite the advent of a new hiking cycle.

CURRENCIES

US DOLLAR: The USD index fell 0.25% to 101.83 following today’s payroll data. Softer-than-expected labor and inflation data this week has led the market to significantly reduce expectations of near-term tightening odds from the Fed. Markets are now pricing less than a 20% chance of a hike this month after ending last week at 70% odds. Despite the reduction in near-term tightening expectations the dollar is set to end the week nearly 1% higher as underperformance in other currencies offered support.

Watch point: A reduction in tightening expectations for the Fed will act as the greatest risk to the dollar maintain its move above the 100 level.

EURO: The euro rose 0.15% to $1.1256 on dollar weakness. The euro has fallen this week on concerns over France’s fiscal problems and Germany’s political/economic constraints. These have added a euro-specific risk premium just as higher energy costs and a more restrictive Fed favor the dollar. France’s projected record borrowing requirement, renewed selling in French government bonds, and a sharp widening of the French–German 10-year spread have revived concern that fiscal and political risk is becoming more consequential for the euro area. France’s risk premium is occurring alongside a weaker German political backdrop, elevated energy costs, low regional gas storage, and persistent competitive pressure from China. These developments leave the euro more exposed to rising oil prices and global duration stress than other major currencies. Money markets have continued to reduce expectations of an October hike, now priced at just 20%, in-line with Fed pricing. However, markets are no longer fully priced for a rate hike before year-end. Meanwhile, eurozone inflation data showed that prices across the bloc rose 3.8% in September, up from 3.2% in August and above market expectations of 3.6%. Core inflation was more contained, rising to 2.5% from 2.4%, in line with expectations.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which has been favorable to the dollar in advent of a hawkish repricing in Fed policy expectations the near-term.

BRITISH POUND: Sterling rose 0.22% to $1.32228. The pound has been outperforming the euro on relative fiscal and political risk, but underperforming the dollar as US yields and Fed policy remain the dominant global FX drivers. Sterling is on course for its strongest weekly gain against the euro since May as French fiscal concerns weigh on the single currency. The UK’s discussion of pension reform and closer EU ties offers some modest support at the margin, but GBP’s broader direction will continue to depend on gilt-market stability, the Bank of England’s expected policy path, and the extent to which the dollar remains supported by elevated Treasury yields. Money markets have reduced expectations of tightening over the next 12 month down to 84 bps, down from 100 bps priced in yesterday.

JAPANESE YEN: The yen rose 0.42% to 157.41 yen per dollar after the US payrolls data. Meanwhile, data overnight showed core inflation in the Tokyo are rise 2.7% Y/Y in September, a sharp rise from August’s 1.8%. The rise marks the fourth straight month of acceleration and the fastest rate increase since November 2025. However, markets remain largely unconvinced of policy action from the BOJ after the bank’s most recent summary of opinions provided little clarity on the timing of a potential rate hike ahead of policy meetings in October and December. However, the minutes did point to a board more favorable to raising rates once more. Meanwhile, the BOJ’s quarterly Tankan showed manufacturing sentiment improved to its highest level in eight years, while overall business conditions reached their most favorable levels in decades. Sentiment regarding the currency has been damaged after the BOJ underwhelmed the investors following its divided decision to raise rates and Governor Ueda’s unconvincing press conference at the meeting. The greatest near-term upside risk for the currency remains market intervention. Markets are pricing roughly a 17% chance of a hike in October and see 19 bps of tightening by year-end.

Watch point: While markets are underwhelmed at the BOJ, a path for additional rate hikes looks to be  appears to be the primary scenario.

AUSTRALIAN DOLLAR: The Aussie is 0.55% higher to $0.6947. Monthly inflation data came in just under forecasts and led markets to further reduce odds of a near-term rate hike. CPI rose 0.4% m/m in August, under forecasts got 0.5%. The trimmed mean measure of core inflation rose 0.2% in August, under forecasts of 0.3%, though the annual pace held at 3.6% for a third straight month. This follows the  Reserve Bank of Australia’s decision to raise rates by 25 bps to 4.60%. The board unanimously voted to raise its cash rate, the fourth hike this year. RBA Governor Bullock said the board believed financial conditions were now tight but were unsure if that would be enough to bring inflation down. She also noted policy worked with a lag and the board wanted to see how the hikes already delivered would impact the economy, a signal markets took as a potential end to further tightening. Bullock referenced that inflation data will play the greatest role in determining where policy lands in the future.

Watch point: August’s hiring figures argue for a higher-for-longer stance, leading the focus to Q3’s inflation data.

TREASURY FUTURES

Yields moved lower across the curve following nonfarm payroll data for September. Payroll growth was weak and prior months were revised lower, yet unemployment, participation, hours, and wage growth were broadly stable. For Treasuries, the report is dovish through the weaker hiring momentum, but its stable household-survey and wage details limit the case for an aggressive repricing in policy. Payrolls have historically underperformed when the Labor Day holiday falls late in the month, as was the case this year. Other labor data have shown no signs of a broad increase in layoffs. Applications for unemployment benefits have been hovering at 57-year lows amid robust corporate profit growth and resilient domestic demand. The unemployment rate increased to 4.2%, labor-force participation remained edged up to 61.8%, the employment-population ratio was unchanged at 59.2%, and the average workweek stayed at 34.4 hours. Average hourly earnings rose just 0.1% in September and were up 3.0% from a year earlier, providing a more benign wage-inflation signal.

While August’s softer core PCE reading has eased immediate concern that inflation is reaccelerating consumer spending remained notably firm, rising 0.9% m/m and real PCE gained 0.6%, following a weak July. Meanwhile, the accompanying GDP revisions further strengthen the case for tighter policy. Q2 real GDP was revised up to 2.2% annualized, while real final sales to private domestic purchasers were revised to a robust 4.6%. The latter measure, capturing consumer spending and private fixed investment, suggests underlying domestic demand was considerably stronger than the headline GDP figure alone implies. For the Fed, growth indicators remain robust, favoring their hawkish stance, though it is likely that policymakers will want to see how inflation trends play out making a rate hike more favorable in December/January.

Watch point: Inflation risk, fiscal and corporate supply, capital competition and term premium will be key factors in determining whether the yield curve maintains its recent flattening or falls into a bear steeping move.

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