Soft Payrolls and Dovish Fed Comments Pause Bond Rout

For the week ending 2 October 2026

As of midday Friday, global equities were little changed on the week as bond markets hogged the spotlight. The yield on the US 10-year Treasury note rose 20 basis points to 5.20% but slipped well below the week’s highest levels (more below). The price of a barrel of West Texas Intermediate crude oil fell $3 to $89.50 as Europe released part of its diesel and crude reserves. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), were little changed at 17.7.

MACRO NEWS

Soft US employment report sparks bond rally

US nonfarm payrolls rose a smaller-than-expected 29,000 in September, while the unemployment rate increased to 4.2%. Downward revisions sliced 60,000 jobs from the prior two months’ totals, and wage growth was sluggish. However, the labor force participation rate rose to 61.8% from 61.6%, a sign that more people are actively seeking employment, which in turn helps push up the unemployment rate.

This soft data helped prompt a further reversal in US Treasury yields, which topped out on Thursday as investors priced out an October rate hike and lowered the odds of one in December as fears of an overheating US economy ebbed. The report also reinforces the view that the labor market is unlikely to be a source of inflationary pressure any time soon.

October hike odds fall after cooler PCE

US core personal consumption expenditures inflation rose 3.0% year over year in August, below the 3.3% consensus estimate. Methodological revisions contributed to the softer reading.

Combined with somewhat dovish comments from New York Fed President John Williams, who said one more rate increase may be needed in late 2026 but that he saw “no need for urgency” after the September hike, the odds of an October hike dropped from 70% to below 15% after the employment data were released. Other Fed officials continue to emphasize that inflation risks have increased even as labor market risks have receded, though Governors Philip Jefferson and Michelle Bowman echoed Wiliams on Thursday, saying the Fed doesn’t need to rush to adjust rates further.

Global bond yields climb

Global sovereign bond markets came under renewed pressure this week. The US 30-year Treasury yield topped out at 5.69% on Thursday, while the 10-year yield reached 5.33%, the highest levels for both issues since 2002. In Q3, Treasury yields recorded their largest quarterly increase since 1994.

Fiscal concerns also weighed on French government bonds. The spread between French and German 10-year yields widened to 159 basis points on Friday, the widest level since the eurozone sovereign debt crisis in 2011. The move reflects investor concerns about France’s fiscal outlook and limited political capacity to reduce borrowing. That spread stood at 110 bps just a week ago. Amid lingering inflation concerns, 10-year Japanese government bonds rose above 3% in yield this week to the highest levels in 30 years.

Middle East oil flows recover as diplomacy stalls

Crude exports from key Middle East producers continued to recover despite the conflict with Iran. Kpler has estimated that shipments reached 12.8 million barrels per day in September, the highest level since the war began in February, and Goldman Sachs estimates that broader Gulf exports have returned to their prewar average. Saudi Arabia also repaired its East-West pipeline, providing another route for oil shipments.

Meanwhile, diplomatic efforts this week made little progress. Qatari mediators sought a compromise involving the US naval blockade and Iranian nuclear concessions, but neither side appeared willing to move. At the same time, the US has also intensified efforts to isolate Iran from international banking and aviation networks. Early in the week, the Trump administration reportedly considered sanctions relief in exchange for nuclear progress, but both US and Iranian officials disputed reports of greater flexibility.

On Thursday, Trump again threatened that if Iran doesn’t sign a deal, it “won’t exist any longer.” Not long after the president’s comments, the Wall Street Journal reported that the US is sending a third aircraft carrier strike group and up to 10,000 additional troops to the Middle East. The military assets are expected to arrive by the end of November, the paper reported, at which time bombing is expected to resume. The US reportedly also sent two Patriot missile batteries to shield Saudi Arabian and Qatari energy infrastructure should strikes resume.

QUICK HITS

On balance, manufacturing purchasing managers’ indices gained in September. In the US, a rise in the prices-paid component was most noteworthy, jumping to 77.9 against expectations for a gain to 73. Services PMIs will be released on Monday.

The final estimate of second-quarter US GDP growth was revised to 2.2% from 1.5%, fueled by stronger consumer spending and investment. Personal consumption growth was revised to 3.8% from 3.4%.

European Central Bank President Christine Lagarde said the eurozone economy remained resilient in the third quarter. She saw upside inflation risks and downside growth risks, but no evidence that the energy shock had become embedded in wages or inflation. Separately, Lagarde wouldn’t rule out leaving her role at the ECB “a few months early” amid speculation that she will take the helm of the World Economic Forum. Her term at the ECB ends in October 2027.

The Reserve Bank of Australia raised its cash rate to 4.6%, the highest level in 15 years.

China’s State Council said it will consider measures to stabilize the property market, support employment, and raise household income. Officials also said monetary policy tools would be adjusted when appropriate. The move is designed to keep economic growth on target rather than deliver a broad revival, analysts say.

Inflation in the eurozone hit a three-year high in September, rising 3.8% year over year.

US job openings fell in August. The openings rate declined to 4.3% from 4.4%, while the quits rate was unchanged at 1.9% and the layoff rate fell to 1.0%.

Brazil holds the first round of its general election on Sunday; prediction markets slightly favor Senator Flavio Bolsonaro to edge out incumbent President Luiz Inácio Lula da Silva. If no candidate receives 50% in the first round, the top two will proceed to a runoff in late October.

The Conference Board’s consumer confidence index fell to 81.9 in September, its lowest level since 2014.

The European Union and Canada are planning to build undersea cables and increase LNG shipments from Canada to Europe as part of an “Alliance for the Future” to counterbalance the US and China, Bloomberg reported Wednesday.

The S&P CoreLogic Case-Shiller national home price index rose 1.9% year over year in July.

Canada’s economy expanded 1.4% year over year in July.

The United Kingdom revised second-quarter GDP growth to an annual rate of 1.4% from 1.2%.

The latest data shows that foreign investors continue to buy America: foreigners purchased a record $942 billion of US equities and investment fund shares in the 12 months through July. The total was the highest in Treasury data (which dates to 1985).

The US finalized less stringent fuel economy standards on automobiles. The new mandate requires an average of 34.5 miles per gallon by model year 2031, down from the prior 50.4-mile standard.

The US Treasury and Internal Revenue Service increased scrutiny of tax-minimization strategies involving exchange-traded funds. New guidance limits certain Section 351 transactions used to diversify concentrated stock positions without immediately realizing capital gains.

The White House announced a voluntary agreement with major artificial intelligence companies on frontier model safety. The companies pledged internal controls designed to identify and address security problems with their technology.

Anthropic’s initial public offering filing outlined a governance structure that gives its seven co-founders majority voting control through a special class of shares. The filing also disclosed $518 billion of infrastructure commitments to a handful of suppliers. The company is reportedly looking to launch their IPO before Thanksgiving.

Chinese refiners have reportedly suspended fuel exports for October to preserve domestic supplies.

The US asked European governments to consider releasing diesel from their strategic reserves as the EU sought alternatives to a US export ban. Prices fell Friday on reports that the EU is considering releasing fuel from its stockpiles, a move that was confirmed by French President Emmanuel Macron after a call with G7 leaders Friday morning Washington time. The seven nations will release a combined 100 million barrels of diesel and crude from their reserves, Macron said.

A Federal Reserve inspector general report found no criminal wrongdoing by former Chair Jerome Powell in the central bank headquarters renovation, though the report criticized project management and oversight, as costs more than doubled. After the report was released, President Trump said that Powell should be forced to resign from the Fed’s board.

The US Treasury said it will automatically enroll 60 million children in Trump accounts, allowing them to receive contributions from private benefactors.

British Prime Minister Andy Burnham said his government believes Iran is behind a security incident at a UK airbase that US forces have used to launch strikes against Iran. Separately, Burnham said “all options are on the table” regarding the UK’s relationship with the EU, including rejoining the bloc.  

THE WEEK AHEAD

Monday: Global services and composite PMIs

Tuesday: Eurozone retail sales

Wednesday: FOMC minutes

Thursday: US initial jobless claims

Friday: Canada employment report