Coverage: US, Europe, Japan, China/Hong Kong. Baseline date 2026-10-04. Window: 27 September to 4 October 2026. The defining tension this week: a clearly weaker US jobs report landed on inflation that is still sticky above 3%, pushing the Federal Reserve toward a policy crossroads.
US Labour Market: Cooling, Not Collapsing
September nonfarm payrolls rose by only 29,000 (consensus 90,000), far below expectations. Private-sector payrolls added 46,000 (consensus 85,000), also sharply missing. The unemployment rate ticked up to 4.2% from 4.1%, reaching the higher end of the year's 4.1–4.2% range established from June through August. While the headline print looks severe, the unemployment rate has not broken out of its recent band — this is cooling, not collapse.
Key breakdowns reveal critical signals. Average hourly earnings growth slowed to 3.0% year-on-year (consensus 3.2%, prior 3.1%) and just 0.1% month-on-month (consensus 0.3%). Wage growth is the upstream driver of services inflation; this deceleration is substantively positive for the Fed, signaling that wage-price spiral pressure is releasing. Manufacturing employment rose 0.071% month-on-month, slightly stronger than services at 0.008%, consistent with the ISM Manufacturing PMI holding in expansion (54.5 in September).
On the demand side, JOLTS job openings fell to 7.079 million (prior 7.335 million, down 3.49%), signaling continued labour-demand contraction. But initial jobless claims came in at only 197,000 (below the 200,000 consensus), and continuing claims also ran below expectations — suggesting that layoffs have not begun. The logic chain: hiring is slowing (payrolls down, openings down) + firing has not started (claims low) + wages are cooling → a labour market in "low hiring, low firing" mode rather than recessionary contraction → this opens room for the Fed to continue easing without reigniting inflation.
Inflation: Core PCE Still Sticky Above 3%, Goods Leading Services
August PCE inflation came in at 3.42% year-on-year (headline) and 3.01% year-on-year (core), with month-on-month rates of 0.31% and 0.25% respectively. Core PCE has settled above the 3% threshold, still meaningfully distant from the 2% target. The breakdown contains a warning: core goods inflation ran at 3.551% year-on-year (0.331% month-on-month), actually higher than core services at 3.361% year-on-year (0.301% month-on-month). Typically, services inflation is stickier than goods; this reversal, combined with PPI running at 9.85% year-on-year, points to upstream production costs and tariff/supply-chain pass-through feeding into terminal goods prices — a distinct pressure line from traditional services inflation.
The logic chain: weak jobs (dovish signal) coexist with core PCE stickiness and rising goods inflation (hawkish constraint) → the Fed faces dual constraints from downside growth risk and unmet inflation targets → policy will remain data-dependent with gradual, small-step easing rather than rapid consecutive cuts. The market's immediate response to this combination was clear: weak jobs pushed down short-end rate expectations, equities rose, and the curve bull-steepened.
Growth: Q2 GDP Revised Higher, But Peak Momentum Is Evident
Q2 real GDP growth was revised up to 2.2% (initial estimate 1.5%, quarter-on-quarter annualised). Combined with August retail sales growing 1.13% month-on-month and 5.36% year-on-year, plus resilient durable-goods orders, the consumption engine has not yet stalled. But GDP growth has already declined from 2.5% in Q1 to 2.2% in Q2, and the University of Michigan consumer sentiment index dropped to 51.7 — a low reading. Peak growth momentum is evident. The Atlanta Fed GDPNow Q3 estimate of 3.7% suggests near-term growth still has support, but the divergence within the data itself signals the economy is near an inflection point.
Global Monetary and Fiscal Policy
United States — Easing has quietly begun, and the door is pushed wider. The federal funds target rate series shows a move to 3.75% in September (previously stable at 3.63–3.64%), confirming the easing cycle has launched. The effective rate remains at 3.88%. Fed total assets edged down to US$6.743 trillion as balance-sheet runoff continues at a moderate pace; M2 rose to US$23.34 trillion, so liquidity in aggregate is not lacking. This week's sharply weaker jobs report and wage cooling have effectively cleared the labour-side obstacle to further cuts, while sticky core PCE sets the pace. Next week's FOMC minutes (7 October) and the dense run of Fed speaker appearances (Logan, Williams, Bowman, Waller, Musalem, Collins, 6–9 October) will be the critical window to calibrate market expectations for the cutting path.
Europe — Inflation rebound constrains ECB easing room. Euro area September inflation rose to 3.8% year-on-year (consensus 3.6%, prior 3.2%), and core inflation came in at 2.5% year-on-year, both firmer than expected with a 0.6% month-on-month jump. The unexpected inflation rebound weakens the case for near-term continued ECB easing; policy is likely to remain in wait-and-see mode. Next week's ECB monetary policy meeting minutes (8 October) will provide the internal view on inflation stickiness.
Japan — Policy normalisation direction intact. The BOJ Q2 Tankan survey for large manufacturers rose to 24 (prior 22), signaling improved business sentiment. August unemployment was 2.5%, still extremely low. Fundamentals support the BOJ's gradual withdrawal from easing. China — No major policy data updates this week; policy assessment awaits subsequent high-frequency data.
Rates and Credit: Bull Steepening with Divergent Credit Signals
Looking at actual yield observations within the coverage window, the short end dropped markedly while the long end held relatively firm, producing a bull-steepening pattern. The 2-year yield fell from 4.92% on 28 September to 4.83% on 2 October, down approximately 9bp — the policy-sensitive short end fully priced in the strengthening of rate-cut expectations from weak jobs. The 10-year yield rose from 5.24% to 5.28% (+4bp), as the long end priced "growth not collapsing + inflation sticky". The 30-year yield rose from 5.56% to 5.63% (+7bp), with long-end weakness also reflecting inflation and term-premium concerns.
The 2s10s spread widened from approximately 32bp to approximately 45bp — the textbook bull-steepening under rising rate-cut expectations, with the short end compressed by policy expectations and the long end held back by inflation and supply. In the broader monthly view, rates have moved down across the curve (2Y, 5Y, 10Y all down more than 40bp from the start of the month), confirming that the downward rate trend is the main direction.
Credit is sending a more cautious signal than equities. High-yield OAS widened from 3.02% to 3.24% over the month (+22bp), while investment-grade OAS moved only from 0.83% to 0.86% (+3bp). The HY widening is far greater than IG, meaning HY-IG spread expansion — risk compensation is rising in the weaker-credit tail, as the credit market demands higher compensation for lower-rated issuers' default and refinancing risk. Here exists a divergence that institutional investors should pay close attention to: US equities (S&P, Nasdaq) closed the week higher and risk appetite appeared to be warming, yet credit spreads were widening. This week's news flow included a dense cluster of securities class-action and fraud investigations (involving AppLovin, Baidu, Alibaba, AST SpaceMobile) plus individual mortgage/fintech-related risk events, corroborating the lift in tail credit risk. The logic chain: HY spreads widening → risk appetite on the credit side has already turned marginally cautious → equity-bond optimism divergences typically resolve with equities catching up. We recommend caution on high-yield credit exposure; equity-side optimism requires earnings and liquidity support to be sustainable.
Global Equities: US/Japan Tech vs Europe/Hong Kong Divergence
United States — Bad news became good news, tech led. The Nasdaq rose 0.93% and the S&P 500 rose 0.24% for the week, rallying rather than falling after the jobs data release — the classic "bad news is good news" dynamic, as the market interpreted weak jobs as a catalyst for accelerated rate cuts. The Dow edged down 0.34%, reflecting a style tilt toward technology. The ongoing AI narrative (Altman publicly defending AI risk, discussions around compute and data-centre capex) provided sentiment support for the tech sector.
Europe — Inflation rebound weighed on valuations, broad declines. The STOXX 50 fell 0.74%, DAX fell 0.46%, CAC 40 fell 2.28%, and FTSE 100 fell 2.04%. The unexpected inflation rebound reduced ECB easing expectations; French and UK markets led declines. Japan — Independent strength, leading globally. The Nikkei 225 rose 4.27%, significantly outperforming all other markets. Improved Tankan readings plus policy-normalisation expectations under a yen and earnings combination, overlaid with spillover from global tech sentiment, supported Japanese equity strength.
China/Hong Kong — Clearly under pressure. The Shanghai Composite fell 1.19%; the Hang Seng Index fell 3.19% and Hang Seng China Enterprises fell 2.85%, with single-day drops of 2.6% and 2.3% respectively — the weakest performance among the five markets. Hong Kong and A-share weakness forms a stark contrast with US and European tech optimism, indicating capital is rotating back toward mature-market tech themes during this phase.
Cross-Market Summary and the Week Ahead
This week's main theme is the "US/Japan tech vs Europe/Hong Kong" split. What drove the US and Japan was rate-cut expectations plus AI and earnings sentiment; what dragged Europe was the inflation rebound; what weighed on Hong Kong was regional capital outflows. Credit-spread widening signals that this round of tech-centred risk-appetite recovery is not a broad, healthy risk-on move — structural dispersion will continue.
The week ahead: 7 October FOMC minutes — the most important event this week. Against the backdrop of weak jobs plus sticky inflation, the minutes' wording on cutting pace and inflation assessment will directly calibrate market pricing and serve as the core volatility source for rates and equities. Fed officials' dense speaking schedule (6–9 October): Logan, Williams, Bowman, Waller, Musalem, Collins — watch for immediate reactions to the September jobs report, especially Waller's hawkish or dovish tilt. 6 October US August trade balance (consensus -89.8, prior -88.6) — imports expected to jump, watch for drag on net exports and Q3 GDP. 8 October initial jobless claims (consensus 195,000) — with jobs now a policy focus, high-frequency labour data's marginal importance has risen. 9 October University of Michigan consumer sentiment (October preliminary, consensus 48.1) — if it remains at low levels, it will reinforce the judgment that growth momentum has peaked. 7–8 October Europe: German August industrial production (consensus +1.4%), ECB meeting minutes — verify euro area manufacturing and policy inflation stance. 8 October Japan household spending and 7 October current account — observe implications for domestic demand and external balance on BOJ path. This is a research view, not investment advice.