The September U.S. nonfarm payrolls report showed clear cooling, further reducing market expectations for a near-term Fed rate hike. Data revealed job growth fell well short of expectations, the unemployment rate edged higher, and wage growth continued to decelerate. Following the release, Treasury yields briefly fell sharply, U.S. stocks advanced, and the rates market quickly pared back bets on a Fed rate hike this month.

The Bureau of Labor Statistics (BLS) reported Friday that U.S. nonfarm payrolls rose by just 29,000 in September, far below the roughly 90,000 expected. August job gains were revised down from 162,000 to 133,000, while July was revised from a gain of 21,000 to a loss of 10,000, with the two months combined revised down by 60,000. The unemployment rate rose to 4.2% in September, missing expectations for it to hold steady at August's 4.1%. Average hourly earnings rose 0.1% month-over-month and 3.0% year-over-year, both slowing from August and below expectations of 0.3% and 3.1%.

Nick Timiraos, the journalist known as the "New Fed Wire," commented on the jobs report, noting that senior Fed officials had already signaled this week that an October hike may not be their base case scenario, and he believes the report did not change that established stance. The most notable aspect of the report, he said, is that neither wages nor the unemployment rate showed the job market re-tightening enough to significantly increase price pressures.

Timiraos argued that, by comparison, the September U.S. CPI report due on October 14 will be more important. That said, the jobs report "did somewhat temper the hawkish tone in the market driven by recent adjustments to Fed rate path expectations."

Wall Street institutional views also leaned clearly toward "no hike in October." Jefferies chief U.S. economist Tom Simons said bluntly that the jobs report "should completely put an end to an October hike," adding: "We had expected the Fed to continue with 25 basis point hikes, but the current situation suggests that policymakers who emphasize there is ample time before the next hike are more likely to remain patient."

Market pricing showed that after the report, traders saw the probability of a Fed rate hike in October falling to about 20%, down from nearly 30% previously.

Job Market Not Re-Tightening, Wall Street Shifts to 'October Wait-and-See'

Looking at the data itself, while September's 29,000 job gain was far below expectations, the report did not show the job market has fallen into outright freefall.

BLS data showed that nonfarm payrolls averaged about 51,000 per month over the past three months and about 41,000 per month over the past year. The unemployment rate rose to 4.2% but remained within this year's narrow range of 4.1% to 4.3%. Reuters cited Natixis chief U.S. economist Christopher Hodge as saying that while the September jobs data was disappointing, it looked more like a continuation of an existing trend rather than a sudden deterioration in the job market. The three-month and one-year average job gains remain above most break-even levels needed to keep the unemployment rate stable.

Meanwhile, wage growth continued to slow. Average hourly earnings rose just 0.1% month-over-month in September, with the 12-month pace slowing to 3.0%. This is one of the key points Timiraos emphasized: the report did not show wage pressures re-accelerating, nor did it show job market tightening sufficient to significantly increase inflation pressure.

Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management, said the cooling in the September jobs report makes a rate hike later this month unlikely. She noted: "Today's softer data refutes the view that the job market is re-tightening." However, she still sees another hike in December as her base case. At the same time, if market stress persists and energy prices rise further, the Fed could be forced to act this month.

Vanguard senior economist Adam Schickling argued that the job market currently shows a state of "low hiring, low firing": hiring is weak, but layoffs remain very low, and monthly jobs data may continue to send mixed signals ahead. In other words, the job market has neither clearly deteriorated nor clearly re-strengthened, giving the Fed reason to continue waiting for more data.

October Hike Bets Plummet, December Still Not Ruled Out by Market

The rates market reacted quickly after the jobs report.

Reuters data showed the market-implied probability of a Fed rate hike in October briefly fell to 12% before recovering to about 21%. Bloomberg, citing interest rate swap market data, showed traders priced about a 20% chance of an October hike, down from nearly 30% before the nonfarm release. At one point, the market even briefly stopped fully pricing a Fed hike this year.

The 2-year Treasury yield briefly fell about 10 basis points before rebounding somewhat. This indicates that the bond market quickly reduced bets on a near-term hike but did not completely abandon the possibility of further Fed hikes ahead.

Greg Taylor, chief investment officer at PenderFund Capital Management, said the jobs report means the risk of an October hike has largely been removed from the market, while a December hike remains on the table. Stephen Kolano, chief investment officer at Integrated Partners, said a weaker-than-expected nonfarm report would push the Fed toward a "wait-and-see on inflation" strategy.

Gary Schlossberg, global strategist at Wells Fargo Investment Institute, similarly said the report clearly reduced October hike risk, though the market still needs to watch the December meeting.

Market Repricing: October Hike Probability Falls to About 20%

The rates market reacted quickly after the jobs report.

Bloomberg, citing interest rate swap market data, said traders' priced probability of a Fed October hike fell from nearly 30% before the release to about 20%, with some periods even briefly no longer fully pricing a Fed hike this year. The 2-year Treasury yield briefly dropped about 10 basis points. Yields then rebounded somewhat, showing that while the market clearly reduced near-term hike bets, it did not completely give up on the possibility of further Fed hikes ahead.

This contrasts sharply with the hawkish repricing the Treasury market had experienced earlier.

Recently, the market had priced in more rate hike risk due to inflation pressure, energy prices, and economic resilience, pushing Treasury yields notably higher. The jobs report temporarily eased that pressure: slower job growth, a higher unemployment rate, and continued cooling in wage growth mean the Fed need not rush to hike again solely out of concern about an overheating economy.

Charles Tan, chief investment officer of global fixed income at American Century Investments, said the report "marginally gives the Fed more room to stand pat," but he also cautioned that the market may need only one or two inflation readings to swing back to a more hawkish side.

In other words, market pricing for an October hike has clearly receded, but the hiking cycle itself has not been ended by this nonfarm report.

'Bad News Is Good News,' but Wall Street Still Fixated on 5% Treasury Yields

A Wall Street Journal report summarized the market reaction as a classic case of "bad news is good news": growth and employment are not that strong, meaning pressure on the Fed to keep hiking declines, which eases the recently elevated Treasury yield pressure and drives stocks higher.

But some institutions warned that the market cannot simply interpret weak employment as a positive.

eToro analyst Bret Kenwell said that if investors are hoping for further job market weakness just to get looser financial conditions, that is not a cost-free trade. Inflation remains a problem, and a genuine job market stall would bring entirely different risks.

Kenwell specifically noted that the 5% level on the 10-year Treasury yield remains a key threshold for the market. If 5% becomes a new yield floor, the logic that the market can continue absorbing higher rates without obvious consequences will face challenges.

Edward Jones investment strategist Angelo Kourkafas said a weaker jobs report could help ease bond market concerns about aggressive rate hikes. If the job market remains broadly stable while corporate earnings continue to grow, stock market fundamentals still have some support.

September CPI Is the Next Key Test

Therefore, the most direct change the September nonfarm report brought to the Fed is a clear decline in the urgency of an October hike, rather than the Fed having already abandoned further tightening.

This is precisely why Timiraos emphasized that "September CPI is more important."

The September CPI report due on October 14 will become important data for the market to judge the Fed's next policy step after the nonfarm report. If inflation continues to show stickiness, especially if it re-accelerates amid rising energy prices, then a weaker jobs report may not be enough to stop the Fed from hiking again this year. Conversely, if inflation cools in tandem, then softening in the job market will further reinforce the Fed's reason to wait.

Based on current market pricing, the September nonfarm report has clearly weakened October hike expectations: traders' bets on an October hike have fallen to about 20%, and some Wall Street institutions even believe the report is enough to "kill" the prospect of an October hike.

But as Timiraos emphasized, the jobs report did not change the Fed's basic stance, and inflation remains the key variable determining the next policy move.

As a result, the market's trading logic is shifting from "will the Fed hike again soon" to "will September CPI reignite rate hike expectations." The October 14 inflation data may become the key to determining the next phase of this policy expectations battle.