Relief in the US bond market after the jobs report and the decline in Treasury yields

A sense of relief returned to the turbulent US bond market on Friday, after the latest jobs report eased fears that the strong growth of the US economy would sharply exacerbate inflation. The decline in bond yields helped US stocks rise again towards their record levels.

The Standard & Poor's 500 index rose 0.9 percent, becoming only 0.8 percent away from its record level recorded in August. The Dow Jones Industrial Average rose 320 points, or 0.6 percent, by 9:35 a.m. Eastern Time, while the Nasdaq Composite Index rose 1.3 percent, according to the Associated Press.

Wall Street witnessed a state of tension after the US government announced that employers across the country added only 29,000 jobs to payrolls last month, a number that fell below economists’ expectations, and represents a slowdown compared to the addition of 133,000 jobs in August.

More importantly for financial markets, the report allayed fears that the US economy would be so strong that it would exacerbate inflation and push it to higher levels. Inflation remains at high levels, exceeding the target level, while the Federal Reserve recently raised the main interest rate for the first time in three years, in an attempt to curb the rapid rise in the cost of living.

Concerns escalated in particular late last month, when a preliminary report showed US business growth accelerating to its fastest pace in years, coinciding with rising corporate costs.

Jobs data released on Friday helped allay fears that the economy was “overheating,” that is, growing at an excessive pace, at least for the time being. The data also prompted traders to reduce their bets that the Federal Reserve will raise the main interest rate again at its next meeting later this month. Traders now see only an 18 percent chance of this happening, compared to 64 percent a week ago, according to CME Group data.

“This report reinforces the case for the Federal Reserve to be patient,” said Adam Schickling, chief economist at Vanguard. He added: “The labor market has not witnessed a sharp deterioration, but on the other hand there is little evidence of a tangible recovery. “This gives policymakers a reason to be patient and wait for more data.”

Decreased expectations regarding a hike in the federal funds rate in October contributed to a decline in yields on various Treasury bond maturities.

The yield on 10-year Treasury bonds, which is a mainstay of the US bond market, fell to 5.20 percent, after approaching 5.35 percent, on Thursday, when it recorded its highest levels since 2002.

Low yields can support the economy by making borrowing costs affordable, while high yields typically put pressure on stock prices and other investments.

Of course, the strength of the US economy and concerns about inflation are just some of the many factors that have pushed Treasury yields to their highest levels in decades.

Concerns remain about massive government spending around the world and the accumulation of high levels of debt. In France, for example, bond yields have witnessed sharp fluctuations, at a time when the government is dealing with record levels of debt and a budget under severe pressure.

However, the decline in oil prices on Friday helped relieve some pressure on global bond markets. The price of a barrel of Brent crude fell by 2.6 percent to $99.64, while oil prices witnessed sharp fluctuations amid uncertainty about when the war with Iran will allow the global oil industry to return to normal.

Low yields in the bond market help investors justify paying higher prices for stocks, even those that face criticism for their high valuations. This helped companies in the artificial intelligence sector consolidate their already strong gains.

Nvidia shares rose by 2.1 percent, being the strongest factor behind the rise of the Standard & Poor's 500 index.

These gains contributed to offset the losses resulting from the decline in Nike shares by 6.1 percent. The sports shoes and clothing company announced fourth-quarter profits that exceeded analysts' expectations, but its revenues were weaker than expected. Nike also provided profit forecasts for the current fiscal year that fell short of analysts' estimates.

In external stock markets, European indices rose, recovering from sharp losses incurred the previous day, following the large fluctuations witnessed in bond yields across the continent.

In Asia, the performance of indicators varied. The Hang Seng Index in Hong Kong fell by 2.6 percent, while the KOSPI Index in South Korea rose by 0.5 percent.

US job growth slowed more than expected in September, but this likely does not reflect a fundamental shift in the labor market, as this weakness is likely related to a calendar imbalance.

The widely followed employment report issued by the Ministry of Labor on Friday showed that jobs in non-agricultural sectors increased by 29,000 jobs last month, after August data was revised downward, to show an increase of 133,000 jobs instead of 162,000. Economists polled by Reuters had expected an increase of 90,000 jobs.

Estimates ranged between a minimum of 35,000 jobs and a maximum of 180,000. Volatility related to “seasonal adjustment” factors, the model the government uses to exclude seasonal fluctuations from data, likely contributed to both the limited increase in jobs last month and the downward revision to August's numbers.

Economists have noted that employment data tends to perform weaker when Labor Day falls late in the month, which is what happened this year. There were no signs of a widespread increase in layoffs, as applications for unemployment benefits remained for the first time near their lowest levels in 57 years, in light of strong growth in corporate profits and solid domestic demand.

However, economists expect that the growing headwinds resulting from the US-Israel war with Iran, including rising energy prices and disruption to supply chains, will begin to negatively impact the labor market by the end of this year until 2027.

Diesel prices are at record high levels, which may begin to impose pressures beyond the transportation and agricultural sectors. The ongoing tariffs are also raising concerns, as a survey conducted by the Institute for Supply Management on Thursday showed manufacturers' concerns about the trade war with Canada.

The unemployment rate rose to 4.2 percent last month, a still low level, compared to 4.1 percent in August. The unemployment rate remains low due to factors limiting labor supply, such as retirements and the Trump administration's strict immigration restrictions. Economists estimate that the economy needs to create between 50,000 and 80,000 jobs per month to keep pace with the growth in the working-age population.

Last month, the Federal Reserve raised the benchmark interest rate on overnight lending by 25 basis points, to a range between 3.75 and 4.00 percent, in the first increase of its kind in 3 years, and also indicated the possibility of further increases in borrowing costs in the future.

The chances of adopting another increase in interest rates declined this month, after inflation data for August and July came in below expectations. Ahead of the jobs report, the CME Group's Fed Watch tool showed that financial markets were pricing in a probability of about 22 percent for further monetary tightening during the Federal Reserve meeting, scheduled for October 27 and 28, down from about 69 percent a week ago.

Global equity funds attracted cash flows for the second week in a row, driven by optimism about spending on artificial intelligence and the decline in inflation in the United States, which boosted investors’ appetite for stocks despite the rise in bond yields.

Equity funds recorded net inflows of $34.76 billion in the week ending September 30, down from $44.31 billion the previous week, according to LSEG Lipper data.

Investors' appetite for risk was strengthened by optimism about spending on artificial intelligence, after Micron Technology on Wednesday expected quarterly revenues to exceed estimates, an indication of strong demand for memory chips used in artificial intelligence applications.

Goldman Sachs said that the largest hyperscale cloud computing companies in the United States are heading to spend about $800 billion on capital expenditures in 2026, with analyst consensus forecasting that spending will rise to $1.1 trillion in 2027. The bank noted that the strength of revenue accumulation and limited supply continue to support investment, while the growth of cloud services revenues at major providers has accelerated sharply this year.

Meanwhile, a Commerce Department report on Wednesday showed that US inflation rose less than expected in August, while price pressures in July were more moderate than initially reported, easing the urgency for the Federal Reserve to raise interest rates again in October.

US stock funds recorded net purchases of $20.6 billion for the second week in a row. European and Asian equity funds also recorded net inflows of $6.19 billion and $6.16 billion, respectively.

However, sector funds recorded net outflows of $919.7 million during the week, as investors pulled $2.63 billion from technology funds after a three-week buying spree, while pumping $1.13 billion into financial funds and $468 million into utility funds.

Global bond funds attracted inflows of $4.76 billion for the second week in a row, albeit much lower than the inflows of $9.24 billion in the previous week. Government bond funds and short-term bond funds recorded significant inflows of $4.13 billion and $5.43 billion, respectively, while high-yield bond funds saw outflows of $2.29 billion.

Money market funds recorded net outflows of $116.52 billion, the largest weekly withdrawal since April 15.

Regarding commodity funds, gold and precious metals funds recorded weekly net purchases of $275.2 million, their lowest inflows in three weeks. In contrast, energy funds recorded net outflows of $559 million, after inflows of $89.3 million in the previous week.

In emerging markets, equity funds recorded outflows of $1.37 billion for the fourth week in a row. Investors also withdrew a net $1.75 billion from bond funds, according to data covering 29,099 funds.

In America, “LSEG Lipper” data showed that investors made net purchases worth $20.6 billion in American stock funds during the week, compared to $37.49 billion in the previous week.

Meanwhile, a Commerce Department report on Wednesday showed that US inflation rose less than expected in August, while price pressures in July were more moderate than initially reported, reducing the urgency for the Federal Reserve to raise interest rates again in October.

US large-cap equity funds attracted inflows worth $19.33 billion, their second largest weekly inflows during the past quarter. Multi-cap funds attracted $1.01 billion, small-cap funds $223 million, while mid-cap funds recorded outflows of $329 million.

In contrast, sector equity funds recorded net outflows of $4.1 billion during the week, driven by net sales of $3.79 billion in the technology sector and $738 million in the industrial sector.

US bond funds saw net inflows of $6.45 billion during the week, the largest inflows in three weeks.

Government bond funds and short- and medium-term Treasuries attracted $4.3 billion, their largest inflows in four weeks. Investors also pumped $4.02 billion into taxable public domestic fixed income funds, while withdrawing a net $2.28 billion from short- and medium-term investment funds with high credit ratings, i.e., investment grade.

Meanwhile, money market funds recorded weekly outflows of $41.36 billion, marking the third week of net redemptions in the past four weeks.