02.10.2026 - Softer Jobs Report — Long-awaited Relief for Bonds
One of this week’s key data points was released today: the US employment report, with potentially important implications for the Fed’s next interest-rate decision.
The US economy created far fewer jobs than expected in September, pointing to a notable softening in the labor market. Nonfarm payrolls increased by just 29’000, significantly below expectations of around 84’000, while the unemployment rate rose to 4.2% from 4.1%.
The weakness was reinforced by substantial downward revisions to previous months. August payroll growth was revised from +162’000 to +133’000, while July was revised into negative territory at –10’000. Combined, the revisions removed around 60’000 previously reported jobs.
The market reaction was immediate. Expectations for another Fed rate hike in October fell sharply, with the weak employment report significantly reducing the probability of further near-term monetary tightening.
Markets: long-awaited relief for the bond market retreating from the multi-year highs reached earlier this week
Equities: Moving higher with Tech in the top position
Bonds: yields falling sharply - US 2y yield above 4.78%, US 10y yield above 5.20%, Japan 10y yield 3.11%
Commodities: Oil prices falling on news Europe will release oil reserves, WTI at USD 89/barrel and Brent around USD 99/barrel;
Precious metals prices higher, gold USD 4’185/oz, silver USD 61/ozCurrencies: US dollar weaker - Japanese Yen unchanged USDJPY 158
Cryptos: higher - Bitcoin around USD 86k
Volatility: The VIX index higher, back below 16 (good opportunity for hedging!)
My View: The market reaction looks very short-sighted to me.
Investors are once again celebrating weaker economic data because it reduces the probability of another Fed rate hike. In the very short term, that is understandable: lower rate expectations provide relief for bonds and support equity valuations.
But the underlying message from today’s report is hardly positive.
The US labor market appears to be losing momentum considerably faster than expected, while previous employment numbers have again been revised lower. At the same time, inflation remains above the Fed’s target, energy costs remain elevated and financial conditions have tightened substantially as bond yields have surged.
This creates an increasingly uncomfortable combination: slower economic momentum without inflation having been fully defeated. As Fed Chair Kevin Warsh recently emphasized, “inflation is too high for too long.”
For the Fed, the situation therefore becomes more complicated rather than easier. A weaker labor market reduces the room for heavy additional tightening, while persistent inflation limits the room for meaningful easing.
For equities, I therefore see little reason to interpret today’s weak employment report as fundamentally bullish. Lower yields provide short-term relief, but weaker growth ultimately means weaker earnings potential.
The market may currently celebrate the reduced probability of another rate hike. The more important question, however, is increasingly becoming: Why should the Fed no longer be able to hike?
If the answer is a rapidly weakening economy, today’s “good news” for markets could ultimately turn out to be bad news after all.
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