Fed Gets a Reason to Wait (5-9 October)

September’s soft US labor data cooled expectations for an immediate Fed hike, pulling the dollar below 102 and helping the euro and pound recover.

Gold and silver also found support, although high Treasury yields and expectations for a possible December hike kept the relief limited.

Inflation accelerated to 3.8% in the Eurozone and 3.3% in Germany, keeping further ECB tightening in play. UK rate expectations also stayed firm as energy costs added to inflation pressure, while concerns over French finances continued to weigh on European bonds.

Currencies

Dollar Index: The dollar index slipped below 102 on Friday, ending a four-day winning streak after September payrolls rose just 29,000, previous months were revised lower and unemployment climbed to 4.2%. The weak report reduced expectations for an October Fed hike, while Brent falling below $100 helped ease inflation concerns. Despite the pullback, the dollar was still heading for a third consecutive weekly gain.
Euro: The euro recovered to $1.126 after touching its lowest level in more than a year, supported by the weak US payroll report and stronger expectations for a Fed hold. Eurozone inflation accelerated to 3.8%, its highest since September 2023, but concerns over French finances and the ECB’s cautious approach to further tightening, echoed by Isabel Schnabel, limited the rebound.
British Pound: Sterling climbed back above $1.32 after hitting a three-month low, benefiting from reduced expectations for an October Fed hike. Traders are pricing around 30 basis points of BoE tightening by year-end as Governor Andrew Bailey continues to flag inflation risks. Prime Minister Andy Burnham’s push for closer UK-EU ties also provided support.
Japanese Yen: The yen strengthened slightly below 158 per dollar after Tokyo core inflation rose to 2.7% in September, staying above the BOJ’s 2% target. The central bank’s September meeting summary pointed to another rate increase this year but gave little indication of timing. High Treasury yields and dollar strength still left the yen on course for a third weekly decline.

Commodities

Gold Catches a Breather

Gold held near $4,140 an ounce as weak US employment figures reduced the probability of an October Fed hike to around 20%. Expectations for a December increase remained above 80%, although Fed officials Philip Jefferson and John Williams called for more time before further tightening.

Oil’s Supply Battle Intensifies

Brent traded near $102 a barrel as reports that the US sent a third carrier strike group and 2,000 Marines to the Middle East added to supply concerns, while China halted most fuel exports for October. Gains were limited by Gulf crude flows approaching prewar levels and a G7 plan to release up to 100 million barrels, with US-Iran talks still uncertain.

Silver’s $60 Line Holds

Silver steadied around $60 an ounce, finding support as softer US employment and wage figures weakened the case for an immediate Fed hike. October hike odds fell to roughly 20%, although the probability of a December move stayed above 80%. Calls for patience from Fed officials Philip Jefferson and John Williams also helped reduce near-term rate pressure.

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. Expectations for an October Fed hike declined, but a December increase is still largely priced in. Lower oil prices offered some inflation relief, while US fiscal concerns and uncertainty in the Middle East kept longer-term yields high.
UK 10 Year Bond Yield: The UK 10-year gilt yield slipped below 5.4% after reaching its highest level since July 2007 as the recent bond sell-off eased. Inflation risks linked to energy prices and signals from BoE officials, including Andrew Bailey, continued to support higher borrowing costs. Traders are pricing in around 30 basis points of tightening by year-end, with the October 28 budget also approaching.
Japan 10 Year Government Bond Yield: Japan’s 10-year yield fell below 3.1%, pulling back from 30-year highs as global bond yields eased and concerns over France’s finances increased demand for government debt. Tokyo core inflation reached 2.7%, strengthening the case for another BOJ hike this year, although policymakers offered no clear timeline. Heavy government spending plans and a weaker fiscal outlook continued to put pressure on Japanese bonds.
Germany 10-Year Bond Yield: Germany’s 10-year Bund yield extended its decline below 3.45% after recently reaching a 17-year high. French yields stayed close to two-decade highs as fiscal and political concerns persisted, while Eurozone inflation accelerated to 3.8%. Despite Isabel Schnabel’s cautious tone, traders are pricing another 25 basis point ECB hike by December and a deposit rate of 3.4% by late 2027.

Economic Data

United States Unemployment Rate

The US unemployment rate increased to 4.2% in September from 4.1%, slightly above expectations, as the number of unemployed people rose by 78,000 to 7.11 million. Employment increased by 406,000, while the labor force expanded by 485,000, lifting participation to 61.8% from 61.6%. The employment-to-population ratio edged up to 59.2%, while the broader U-6 unemployment rate declined to 7.6% from 7.7%.

Germany Inflation Rate

Germany’s annual inflation rate accelerated to 3.3% in September, its highest since December 2023 and above the 3.2% forecast. Energy inflation jumped to 14.9% as higher oil prices added pressure, while food inflation rose to 0.4%. Services inflation eased to 2.7%, core inflation held at 2.4%, and the harmonized rate also reached 3.3%.

US Job Openings

US job openings fell by 256,000 to 7.079 million in August, the lowest in five months and below expectations of 7.23 million. Professional and business services and health care recorded some of the largest declines, while the West saw the steepest regional drop. Hires held near 5.2 million and separations at 5.1 million, with quits and layoffs showing little change.

China NBS Manufacturing PMI

China’s NBS Manufacturing PMI rose to 50.1 in September from 49.8, matching expectations and signaling the first expansion since June. Output growth reached a nine-month high, although new orders grew at a slower pace and both employment and foreign orders continued to contract. Input costs and output prices climbed to five-month highs, while business sentiment stayed at a five-month low.

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