A sharp miss on jobs shakes rate expectations
September's employment report landed far below forecasts, with nonfarm payrolls rising by only 29,000 against expectations of about 90,000, according to the Bureau of Labor Statistics. The unemployment rate moved up to 4.2% from 4.1%. The softness was not isolated: July's gain was revised down by 31,000 and August's by 29,000, cutting a combined 60,000 jobs from earlier estimates. Health care led hiring with 17,000 positions, followed by construction at 11,000 and manufacturing at 9,000, while financial activities shed 7,000 jobs in the month and 129,000 since a May 2025 peak.[S1][S2]
Market participants adjusted their positions almost immediately. According to CME FedWatch, the likelihood that the Fed leaves rates unchanged at its October gathering rose to 83% and then 85%, up from 75% just one day before, while the prediction market Kalshi reflected a comparable move. The chance of no change through year-end climbed to 25% from 7% a week earlier. The 10-year Treasury yield dropped by as much as 6 basis points to 5.17% before rebounding to 5.26%, and the 2-year yield, which tracks Fed expectations closely, slid as much as 6 basis points to 4.72% before edging upward.[S1][S2]
Stocks rally as investors bet on a pause
Equity indexes climbed as the rate outlook softened. The Dow Jones Industrial Average rose as much as 500 points before paring gains, while the Nasdaq gained more than 1% and reached a new record high. Nvidia touched a fresh all-time high, its first in five months. Around 1 p.m. ET, the S&P 500 stood at 7,777.00, up 0.69%; the Dow at 51,146.00, up 0.34%; and the Nasdaq 100 at 31,101.25, up 1.11%. Technology shares drew heavy buying, helped by optimism around AI agents and anticipation of large IPOs from AI companies such as Anthropic and OpenAI.[S1]
The move followed a week in which a spike in yields had pressured stocks. Analysts framed the shift as a repricing of Fed risk. Jamie Cox of Harris Financial Group argued there is now no chance of an October hike and that September should have been a hold, adding that inflation pressure outside energy is lower. Seema Shah of Principal Asset Management said a soft jobs report should push an October hike firmly onto the back foot, easing Treasury yields and reducing the urgency for the Fed to act. Adam Schickling of Vanguard said the data strengthens the case for patience, since the labor market has neither deteriorated sharply nor clearly strengthened.[S1]
Housing costs and the road ahead
For the housing market, the pressure has not lifted. Freddie Mac's mortgage rate rose from 6.66% at the start of September to 7.28% this week, a 62 basis point jump that Realtor.com calculates equals about $19,000 less house on a $2,000 monthly budget for principal and interest. Realtor.com senior economist Jake Krimmel described the September payroll figure as a clear miss but said it mostly extends existing trends, noting that layoffs have not picked up and jobless claims have been falling, so a low-hire, low-fire market is likely to persist into 2027.[S2]
Under Chairman Kevin Warsh, the Fed's priority is reining in supply-driven inflation stemming from geopolitical turmoil and costlier energy. Krimmel noted that the weak payrolls figure probably won't shift the Fed's thinking much, since unemployment is still low and the report hardly represents a labor collapse severe enough to divert the FOMC from inflation concerns. The FOMC convenes Oct. 27-28, and although a pause now appears more probable, the consensus still anticipates one more increase before the year ends. Attention next shifts to September's consumer inflation data on October 14.[S1][S2]
