By: Daniela Hathorn, Senior Market Analyst at Capital.com
Equities are benefiting from Friday’s softer US labour-market report which saw September payrolls increased by just 29,000, well below expectations, while the previous two months were revised down by a combined 60,000 and unemployment edged up to 4.2%. The data helped reduce expectations for another Fed hike in October, helping the Nasdaq 100 close Friday at fresh highs and taking some strength out of the dollar. The complication is the bond market, which remains stubbornly weak. The 10-year Treasury yield is still around 5.25%, despite the disappointing payroll report and reduced expectations of an imminent Fed hike. That reinforces the idea that the long-end sell-off is being driven by more than monetary policy: elevated real yields, heavy borrowing and competition for capital continue to demand a higher term premium. For equities, this creates an unusual divergence as growth stocks are rallying because Fed expectations have softened, while the risk-free rate against which those valuations are judged remains exceptionally high.
Oil continues to be a key focus as Middle Eastern crude exports recover towards pre-war levels and Saudi Arabia cuts its November selling prices to Asia sharply. OPEC+ also kept November production targets unchanged. But the geopolitical backdrop remains far from resolved: Iran says Hormuz will remain closed until Washington accepts its conditions, tanker attacks have continued off Oman and fighting around Yemen is intensifying. So the market is balancing improving physical supply against an unresolved political situation. That leaves markets in a relatively favourable position provided oil eases and yields do not resume their climb. Softer employment has given the Fed more room to pause, while resilient corporate earnings continue to support equities. Today’s US ISM Services PMI will be the next test: another strong activity reading could revive the “good news is bad news” dynamic and push yields higher again, while evidence of moderation would reinforce the case for the Fed to wait. Wednesday’s FOMC minutes should then provide more detail on how much appetite remains within the Fed for further tightening.
