Morning Market Brief – 2026-10-04

Behind us is a week of extreme emotions, and ahead lies a market opening that is still digesting the surprising data from recent days. Friday's key US labor market report brought a drastic cooling, leading investors to almost entirely price out another interest rate hike by the Federal Reserve (Fed) in October. Despite this, the historic sell-off in the global debt market persists, with bond yields remaining at multi-year highs. Meanwhile, in Europe, energy price-driven inflation is rearing its head once again, putting the European Central Bank in a tough spot heading into the new week.

Geopolitical Environment

• G7 intervenes in the fuel market. G7 leaders agreed to a coordinated release of 100 million barrels of oil and fuel through the International Energy Agency (IEA). This process will span four months, with a significant, pre-scheduled tranche of diesel fuel hitting the market in the first 20 days. Markets are approaching this news with some caution—official communications do not clearly state what portion of these 100 million barrels will represent genuinely new net supply, and what part is the fulfillment of prior commitments. (Sources: European Commission; Reuters)

Today's Highlights

• Sharp deceleration in the US labor market. In line with the warning signs we noted following the weaker private ADP report, official Department of Labor data proved to be a major disappointment. Nonfarm Payrolls added just 29,000 jobs in September, while the unemployment rate rose to 4.2%. What is more, data for July and August was revised down by a cumulative 60,000 (August alone was revised down from 162,000 to 133,000). Such weak figures are a clear sign that high interest rates are effectively stifling labor demand. (Sources: U.S. Bureau of Labor Statistics; Reuters)
• Market unwinds Fed rate hike bets, but bonds live a life of their own. Following the jobs data release, the odds of a Fed rate hike at the late October meeting dropped sharply—from around 64–70% to just 17–25%. US equity markets reacted euphorically (weaker data implies a more dovish central bank). Surprisingly, however, the US debt market behaved otherwise. Although bond yields initially fell, they quickly reversed course and ended Friday higher. As a reminder, last week the yield on 10-year US Treasuries touched 5.34% (the highest since 2002), while the yield on British 30-year bonds exceeded 6% (the highest since 1998). The lack of relief in the debt market, despite weak economic data, suggests that investors are demanding an increasingly higher risk premium for holding long-term paper. (Sources: CNBC; Reuters)
• Eurozone inflation headaches return. The preliminary (flash) estimate of Europe’s Harmonised Index of Consumer Prices (HICP) showed an increase in September to 3.8% year-over-year (from 3.2% in August). The primary culprit is energy—price momentum in this category skyrocketed to 18.8% YoY from a previous 14.3%. Core inflation (excluding volatile energy, food, alcohol, and tobacco prices) also ticked up slightly, rising to 2.5% from 2.4%. This is corroborated by high prints across the bloc's largest economies: Spain recorded 5.0%, Italy 4.1%, France 3.4%, and Germany 3.3%. This complicates matters for the European Central Bank, which may be forced to keep policy restrictive for longer than markets had anticipated. (Sources: Eurostat; Reuters)

Market Backdrop

• Chinese manufacturing finally catches its breath. After months of sluggishness, the Chinese manufacturing sector is sending positive signals. The official Purchasing Managers' Index (PMI—a measure of manufacturing activity) rose in September to 50.1 points from 49.8 points in August, thus returning above the 50-point threshold that separates expansion from contraction. The private sector survey (RatingDog) looks even better, with the index jumping to 52.1 points. (Sources: Reuters)
• Japanese business looks to the future with optimism. As we recently noted, accelerating inflation in Tokyo has provided the Bank of Japan (BOJ) with arguments in favor of policy normalization (maintaining the benchmark rate at around 1.25%). The latest, crucial Tankan report adds to this picture. Sentiment among large manufacturers rose to 24 points from the 22 points recorded in June. Only the services sector lagged (falling from 37 to 35 points). Solid industrial sentiment eases pressure on the BOJ and lends credibility to its hawkish course. (Sources: Bank of Japan; Reuters)

What to Watch

The coming week will be dominated by analyzing the fallout from the weak US labor market and testing investor appetite for new debt at current, record yields.

• 05.10 (10:00) – Speech by Philip R. Lane of the ECB. The address by the Chief Economist of the European Central Bank will be watched closely in light of the latest, higher inflation data from the eurozone.
• 05.10 (16:00) – US: ISM Services Report. A key barometer of activity across the massive US services sector. It will show whether the weakness observed in the labor market is already spilling over into the broader economy and services.
• 06.10 (11:00) – Eurozone: Retail Sales. August data will indicate how European consumers are coping in the face of rising energy prices.
• 07.10 (20:00) – US: FOMC Meeting Minutes. Minutes from the Federal Reserve's September meeting. Following Friday's labor market shock, investors will be looking for cues regarding the level of economic "pain" the Fed is willing to tolerate in its fight against inflation.
• 07.10 and 08.10 (19:00) – US: Treasury Bond Auctions (10- and 30-year). This could be the most important technical test of the week. The massive debt sell-off has pushed yields to multi-year highs. These auctions will show whether institutional capital is returning to the market at current price levels.