Fed Rate Hike Odds Fade After Weak September Jobs Report

Fed rate hike odds for October fell to about 16% after September payrolls rose just 29,000, lifting the Nasdaq and S&P 500 even as 10-year yields ended higher.

Lead

A sharply weaker-than-expected September jobs report cut the odds of a Federal Reserve rate hike at the October 27-28 policy meeting and sent US equities higher on Friday, October 2. Employers added 29,000 jobs, well below the roughly 84,000 economists had forecast, while the unemployment rate rose to 4.2% from 4.1%. The S&P 500 closed at 7,722.72, up 0.73%, and the Nasdaq Composite finished at 27,190.86, up 1.19%. The Dow Jones Industrial Average added 0.49% to 51,176.96.

The fed rate outlook shifted quickly. Futures tracked by the CME Group's FedWatch tool priced the chance of an October increase at about 16%, with intraday readings as low as 12%. A week earlier the figure was near 64%.

What Did the September Jobs Report Show?

The report showed the sharpest hiring slowdown in months. Nonfarm payrolls rose 29,000, and August was revised down to 133,000 from 162,000. The unemployment rate edged up to 4.2%, partly because more people entered the labor force.

The miss mattered because the Fed had been weighing further tightening. A labor market that adds fewer than 30,000 jobs a month reduces the pressure on wages and demand that would justify another increase in interest rates. It also gives policymakers a reason to wait for more data before acting.

Why Did Stocks Rally While Treasury Yields Reversed?

Stocks rallied because a weaker labor market lowered the odds of further tightening, which supports equity valuations, particularly in growth and technology shares. Treasury yields followed a different path.

The 10-year Treasury yield fell about 6 basis points to 5.18% in the first reaction to the data. It then reversed through the session and closed up about 5 basis points at roughly 5.28%. The 2-year yield, the tenor most sensitive to Fed expectations, finished near 4.72%. The 30-year yield stood at about 5.63%.

The reversal left yields near their highest levels since 2002, which the 10-year note reached earlier in the week. Bond buyers weighed the jobs miss against elevated energy prices and supply and geopolitical concerns that keep inflation risks alive. The Treasury market treated the report as a delay in tightening rather than a change in the broader rate backdrop.

Equities were less constrained. The Nasdaq led the major indexes as lower hike odds eased pressure on large technology names.

How Does This Change the Fed's Next Move?

The report makes a hold the base case for the October 27-28 meeting. With hike odds near 16%, futures imply roughly an 84% chance that policymakers leave the target range unchanged. Before the data, an increase was priced as a coin flip or better.

Two more reports will shape the decision before the meeting: the next round of inflation data and the October employment survey is not due until after it. The Fed therefore has one fewer labor reading than usual to lean on. A further soft inflation print would strengthen the case for holding. A hotter reading would revive hike pricing, since the central bank has said it will respond to inflation persistence.

Sector and Stock Moves

Technology shares led the advance. Nvidia (NVDA) rose 1.34% to $233.95 and briefly touched an intraday record. Tesla (TSLA) gained about 4% after reporting third-quarter deliveries of 486,532 vehicles, ahead of consensus.

Outside equities, November crude oil fell 1.90% to $91.11 a barrel, and gold slipped 0.95% to $4,162.30 an ounce. Bitcoin rose 1.56% to $86,032.

What Comes Next for Markets and Rates?

The next signals are inflation data and corporate earnings. Third-quarter results from large technology and consumer companies will show whether weaker hiring is feeding through to demand. For the Fed, any further cooling in prices combined with a soft labor market would extend the case for patience.

For the bond market, the key variable is whether yields can retreat from 2002-era highs. The failure of the 10-year to hold its early drop suggests that supply, term premium and energy-driven inflation risk remain as important as the near-term Fed path.

Outlook

A 29,000-job September report removed most of the market's expectation of an October rate hike, and equities responded with gains led by the Nasdaq. Treasury yields gave back their early decline and finished higher, leaving borrowing costs near multi-decade highs. The October 27-28 Fed meeting now looks like a hold unless inflation data surprises to the upside, and the next two weeks of price data and earnings will test that view.