Fed Rate Hike Bets Collapse After Weak Jobs Data, Lifting Equities but Dollar Gains on Euro Rout

Asian stocks rallied Monday after U.S. labour market data sharply lowered the probability of a Federal Reserve rate hike at its October meeting, while the dollar’s advance against a basket of currencies was fuelled mainly by a plunge in the euro.

Japan’s Nikkei jumped 2%, and MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.9%. TSX futures also pointed higher, according to Investing.com. The moves came after Friday’s U.S. nonfarm payrolls report showed job growth slowed more than expected in September and the prior two months’ counts were revised sharply lower.

Traders on Monday saw an 18% probability of a Fed rate hike in October, according to the CME FedWatch Tool, a steep drop from 64% a week earlier. The central bank raised its benchmark rate by 25 basis points to the 3.75%-4.00% range last month, its first increase in three years.

“The softer labour market data has helped dial back October Fed hike expectations, which is providing gold some support,” said Tim Waterer, chief market analyst at KCM Trade, in a report from Reuters via Thestar. He added that “the market is still treating the Fed’s broader hiking cycle as intact even if a pause occurs in October.” A December hike remains fully priced in, with an 81% chance.

“Labour conditions are stable overall, but Friday’s downward revisions signal that the US economy has lost jobs in two out of the nine months year to date, and the risk of further employment losses means that the Fed can’t hike another 100 basis points from here, which is what the curve is pricing in,” said Jose Torres, senior economist at Interactive Brokers, as quoted in a Reuters story from wkzo.com.

**Euro Slide Drives Dollar Higher**

Despite the fading October rate-hike bets, the U.S. dollar index rose 0.5% to 102.39, supported largely by a sharp selloff in the euro. The single currency tumbled more than 0.8% to $1.1161 in Asian trading, its lowest in 17 months, before recovering slightly to $1.1178. The euro lost roughly 2.5% last month.

The pressure on the euro stems from mounting worries about high debt levels and political gridlock in France ahead of next year’s presidential election. The premium demanded by investors to hold French 10-year bonds over German bunds surged above 150 basis points on Friday, stoking concerns of a broader spillover across European markets.

“We’re starting to see some cracks in overall euro sentiment,” said Bart Wakabayashi, branch manager at State Street in Tokyo, in the same Reuters report. “Real money are selling euro against the dollar very aggressively.”

Elias Haddad, global head of markets strategy at BBH, noted the competing forces on the greenback: “Tighter policy elsewhere and a growing case for an October Fed pause are US dollar headwinds. But US growth outperformance and strong foreign appetite for US securities keep US dollar risks skewed to the upside.”

Sterling slipped 0.23% to $1.3207, while the yen fell 0.15% to 158.10 per dollar.

**Bonds Steady, Yields Near Multi-Year Highs**

Benchmark 10-year U.S. Treasury yields edged down slightly to 5.2686%, while two-year yields stood at 4.8101%. Still, yields across major economies remain near multi-year highs as bond prices face pressure from deteriorating government finances, a glut of issuance and elevated energy costs.

A trader who declined to be identified said clients have expressed reluctance to buy U.S. Treasuries unless there was a “material improvement” in the Middle East war, according to the Reuters report.

**Gold, Oil, and Other Commodities**

Gold prices initially drifted higher, with spot gold rising 0.3% to $4,153.56 per ounce by 0631 GMT and U.S. gold futures for December delivery gaining 0.5% to $4,181.70, as reported by Thestar. But the firmer dollar later weighed on bullion; in later Asian trade, spot gold fell 0.24% to $4,132.33 an ounce, according to the wkzo.com report.

Oil prices slipped as rising crude exports from the Middle East and a release of oil stocks by the Group of Seven nations added to supply, offsetting concerns about further damage to Gulf oil infrastructure amid the U.S.-Israeli war on Iran. Brent futures were down 0.5% at $101.75 per barrel, while U.S. crude slid 0.9% to $90.29.

Among other precious metals, spot silver gained 1.7% to $61.40, platinum rose 1.1% to $1,716.92, and palladium added 0.3% to $1,165.40.

**Geopolitics and Elections**

On the geopolitical front, Yemen’s Saudi-backed, internationally recognised government announced Sunday it was launching a major military campaign to recapture all areas controlled by the Iran-backed Houthis, according to Thestar. Waterer said Middle East developments “will continue to matter for gold, particularly through their impact on oil prices and the broader inflation outlook.”

In Brazil, markets are expected to jump later Monday after it became clear that Senator Flavio Bolsonaro will face President Luiz Inacio Lula da Silva in the presidential runoff, doing better than expected in the first round of voting, the Reuters report from wkzo.com noted.

Trading was thin in Asia with holidays in China, South Korea and Australia’s New South Wales. Eurostoxx 50 and DAX futures inched down, while FTSE futures added 0.26%.