Asian Stocks Rally, Dollar Wobbles as Soft Jobs Data Crush October Fed Hike Bets

Asian stocks rallied Monday and the dollar swung between gains and losses as soft U.S. jobs data killed near-term Federal Reserve rate hike bets, shifting focus to a potential December move.

Data released Friday showed U.S. job growth slowed more than expected in September, and the nonfarm payrolls count for the prior two months was sharply revised lower. The report slashed the probability of an October rate hike to about 18%, according to the CME FedWatch Tool, compared with a 64% chance one week earlier. Traders still priced in an 81% likelihood of a December increase, as reported by Thestar.

The receding chance of an immediate hike lifted risk appetite across Asia. Japan’s Nikkei rose 2%, and MSCI’s broadest index of Asia-Pacific shares outside Japan advanced 0.9%, according to wkzo.com. In Canada, TSX futures pointed higher as the same macro shift buoyed sentiment, Investing.com reported. U.S. equity futures were mixed, with S&P 500 futures edging down 0.1% and Nasdaq futures flat.

Dollar and Euro Diverge

The dollar index gained 0.5% to 102.39 against a basket of major currencies, but the move was driven largely by euro weakness rather than broad greenback strength. The euro tumbled more than 0.8% to a 17-month low of $1.1161 in Asian trading before recovering slightly to $1.1178. The common currency has lost about 2.5% in the past month, pressured by mounting worries over France’s deteriorating fiscal position and political gridlock ahead of next year’s presidential election.

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

The premium investors demanded to hold French 10-year bonds over safer German bunds shot above 150 basis points on Friday, stoking fears of broader contagion across European markets.

“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,” Elias Haddad, global head of markets strategy at BBH, said according to wkzo.com.

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

Bonds and Commodities

Benchmark 10-year U.S. Treasury yields retreated slightly to 5.2686%, while two-year yields stood at 4.8101%, as the softer rate outlook offered some respite to bonds. Still, yields across major economies remain near multi-year highs owing to deteriorating government finances, a glut of issuance, and elevated energy costs.

Gold nudged higher initially but remained constrained by dollar strength. Spot gold rose 0.3% to $4,153.56 per ounce early Monday, Thestar reported. “The softer labour market data has helped dial back October Fed hike expectations, which is providing gold some support. But the market is still treating the Fed’s broader hiking cycle as intact even if a pause occurs in October,” said Tim Waterer, chief market analyst at KCM Trade, as quoted by Thestar.

Oil prices slipped amid rising Middle East crude exports and a release of oil stocks by the Group of Seven nations, offsetting concerns about damage to Gulf infrastructure from the conflict with Iran. Brent crude futures fell 0.5% to $101.75 a barrel; U.S. crude slid 0.9% to $90.29.

“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,” Jose Torres, senior economist at Interactive Brokers, told wkzo.com.

Trading volumes were thin with holidays in China, South Korea, and Australia’s New South Wales.