Cheap money era ends, forcing investor strategy shift
Bond yields hit multi-decade highs, signalling the end of cheap money and forcing investors to demand higher returns.
US September payrolls rose 29K, far below the 90K expected. Unemployment ticked up to 4.2% and wage growth slowed.
Across most metrics, the report was weak. The headline figure fell far short of expectations, the jobless rate edged up, and wage increases were significantly lower than forecast. Additionally, the previous two months saw a total downward revision of 60K, and July now records a 10K drop in payrolls.
Before the release, Fed funds futures implied a 28% probability of a rate increase, while USD/JPY stood at 157.60. Two-year Treasury yields were 4.78% and ten-year yields 5.23%. Shortly after the data came out, the Fed funds rate probability dropped to 15%, USD/JPY fell to 157.15, and yields moved to 4.72% for 2s and 5.17% for 10s. The chance of any rate hike this year in December is now just 88%, leaving room for debate.
Market moves indicate a dovish reading, and unless the CPI comes in extremely hot, an October rate hike is off the table. A key counterpoint comes from the household survey, which showed employment up 406K and the labor force rising 485K. That pushed the participation rate up two-tenths to 61.8%. The rise in unemployment to 4.2% is not alarming, as the unrounded rate was 4.1753%, only slightly above the threshold for a 4.2% print.
The payroll figures:
Wage data may be the Fed's key focus, and they are unmistakably soft. Average hourly earnings increased by only 5 cents, or 0.1%, in September, and the annual rate declined to 3.0%. Weekly hours remained steady at 34.4, indicating firms are not drastically reducing hours, but wage growth is easing in a way favorable for inflation.
No single sector is responsible for the overall weakness. Healthcare employment rose 17K, driven by 13K in ambulatory care and 12K in hospitals, while nursing and residential care shed 9K. Construction gained 11K, including 12K from non-residential specialty trade contractors. Manufacturing added 9K, bringing total gains to 72K since the December 2025 trough.
Weakness was seen in financial activities, which lost 7K positions and has dropped 129K jobs since May 2025, mainly in insurance. Government payrolls decreased by 17K, professional and business services fell 9K, and information lost 10K. In contrast to August, there was no significant seasonal distortion from education or restaurants that inflated the headline.
The 29K headline figure is genuinely weak, not one easily dismissed due to composition. Private payrolls added only 46K, prior two months were revised down by 60K, and wage data fell far short of expectations.
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