Futures Rise, Yields and Oil Drop Ahead Of Key Jobs Report

US futures climbed and bond yields reversed an earlier rise, as a drop in oil prices provides a tailwind in calm trading following a week in which markets were lashed by sharp swings in yields, with the US payrolls report still to come. As of 8:15am ET, S&P 500 futures were up 0.4% after Thursday’s close left the index headed for its worst week since August; Nasdaq 100 contracts have added 0.8%. In premarket trading, chipmakers rallied while all Mag 7 are higher, with NVDA (+1.7%) the outperformer. The stabilization in yields overnight, in addition to the Treasury rally yesterday, was supportive of risk assets. Overnight, there weren’t many new macro headlines, with investors waiting for NFP today. See Feroli’s preview below. Yet under the hood, tighter financial conditions are crushing equity breadth, which is now at levels last seen during the dot com bubble.  Bond yields are 1-2bp lower across the curve amid a -3.8% decline in oil. Treasuries gained across maturities with 10-year yields down 1 bp to 5.23% ahead of payrolls. While US rates were calm, Europe’s debt crisis is getting worse as the premium on France’s 10-year yield over Germany’s hit its highest level since 2011 as unease over policy gridlock in Paris grew.  Gilts and bunds are rising in lockstep, with UK and German 10-year yields falling 6 basis points each. French bonds are lag peers, widening spreads further. Base metals fell 1-2%; precious metals were unchanged. The dollar snapped a four-day run of gains as it headed for a third weekly advance, which would be its longest under the current Presidential term. Bitcoin climbed. Today’s US economic data slate also includes August factory orders 10 a.m. Fed speaker slate includes Dallas’s Logan (10 a.m.) and Chicago’s Goolsbee (12 p.m.)

In premarket trading all Mag 7 stocks are higher (Nvidia +1.7%, Alphabet +0.4%, Tesla +0.7%, Amazon +0.5%, Microsoft +0.9%, Meta Platforms +0.4%, Apple +0.2%)

• Airbnb (ABNB) rises about 2% after KeyBanc Capital Markets upgraded the online travel company to overweight, seeing positive growth trends.
• Edison International (EIX) falls 2% after Jefferies cut its recommendation on the utilities company to underperform on California wildfire liability risk.
• Fair Isaac (FICO) falls 8% as the FHFA is planning to direct Fannie Mae and Freddie Mac within weeks to require lenders to pull credit data from two major credit reporting bureaus instead of three, according to a person familiar with the plans. TransUnion (TRU) falls 3% and Equifax (EFX) slumps 3%.
• Nike (NKE) slumps 9% after the sneaker and sportswear maker’s revenue guidance for the full year fell short of consensus estimates.
• Twilio (TWLO) rises 1% after S&P Dow Jones Indices noted that the stock will replace Warner Bros Discovery in the S&P 500 effective Oct. 6.
• ON Semi (ON) climbs 8% after the chipmaker said it will buy Synaptics for $123 per share, revising their earlier all-stock deal to an all-cash transaction. Synaptics (SYNA) rises 15%.
• Vylor (VYLR) climbs 3% after the Corteva Inc. seed spinoff was initiated with buy ratings on its growth profile.
• Western Digital (WDC) falls 8% and Seagate Technology (STX) drops 12% after Nikkei reported that Toshiba would invest ¥60 billion to double its production capacity for hard disk drives.

In other corporate news RTX received a deal worth as much as $24.4 billion to accelerate production of a key anti-air and anti-surface missile for the US Navy;  Amazon is exploring a deal to shift about $8 billion worth of top-end Nvidia chips off its balance sheet into a special-purpose vehicle, according to the FT. Netflix reported a collaboration agreement with independent Spanish streamer Filmin.
Twilio will replace Warner Bros Discovery in the S&P 500, Vylor replaces Corteva in the S&P 500 and Moderna replaces Warner Bros Discovery in the Nasdaq 100. Nike is cutting jobs and embarking on a sweeping overhaul of its business as results deteriorate, a restructuring plan that it said will save $2.5 billion over the next five years. The FHFA is said to be planning to direct Fannie Mae and Freddie Mac within weeks to require lenders to pull credit data from two major credit reporting bureaus instead of three.

Sentiment was lifted after Brent fell below $100 a barrel as European countries were said to discuss the release of strategic reserves. The retreat took some pressure off the inflation outlook, helping traders pare expectations for US rate hikes to only one move this year. The odds of more than three over the next 12 months also receded.

Yet divisions are emerging at the Fed, with Lorie Logan wanting more hikes to cool inflation, while members of the central bank’s troika have been calling for patience to see how data unfolds over the coming weeks.

On that front, payrolls are first on the slate for today. The September jobs report is expected to show nonfarm payrolls increased 90k vs August’s 162k increase and unemployment rate steady at 4.1%; Bloomberg crowd-sourced whisper number for payrolls is currently 86 while Bloomberg Economics expects 55k, which would point to a labor market stuck in low-hiring mode with the drivers of job growth shifting. This mix — along with early tracking of cooler September core CPI — would do little to strengthen the case for another rate hike, according to Bloomberg (our full preview is here).  The US jobs report will be key at a time when resilient data are supporting riskier assets while giving the Fed room to fight inflation. 

“If we get a very high number or materially higher than 90,000, you could expect more pressure on yields from here,” said Sotirios Nakos, head of multi-asset portfolio management at Aviva Investors.  For Mabrouk Chetouane at Natixis IM, strong data will bode well for third-quarter earnings and see traders price “growth and Fed hikes accordingly.”

Andrea Tueni at Saxo Bank warned that a blowout report could put stocks at risk. “US equity markets have so far managed to cope with really elevated bond yields, but I’m not sure how high these can go from here before something breaks,” he said.

The S&P 500 Equal Weight Index is on track for its seventh-consecutive weekly loss, which would be its longest streak since May 2022. BofA’s Hartnett describes a market “trading long artificial intelligence” (Nasdaq 100), “short artificial irrelevance” (S&P 500 Equal Weight). US equities saw $2.7 billion exit in the last week of the quarter, according to BofA citing EPFR Global data, while global bond funds drew $18.8 billion. Flows provide evidence of investors shifting to the safest paper, with Treasuries enjoying the 14th consecutive week of inflows.

High oil prices, AI giants’ surging demand for capital and a crowded short base in Treasury futures have fueled a spike in bond volatility that has rippled across asset classes. Thursday brought an unusual divergence, with Treasuries rallying on haven demand while riskier debt came under intense selling pressure.

Meanwhile,high-grade debt has lost some of its haven appeal as spreads on global corporate bonds blew out this week to their widest in six months. Fresh evidence of building price pressures came from the euro area, where inflation quickened to a three-year high. At the same time, bond traders were nursing losses after Paramount’s debt issue, to fund the biggest Hollywood buyout ever, cratered in initial trading. Meanwhile, Broadcom’s Wall Street syndicate are starting to gather $60 billion of fresh AI chip financing to benefit Anthropic and other companies.

In politics, Trump predicted that Democrats would impeach him for a third time if they retake control of Congress, seeking to boost voter enthusiasm for Republican candidates, as his approval rating hits new lows. The US administration has diverted aid set for EMEA countries to conservative-leaning governments in Latin America, the Washington Post reported.

Separately, governments around the world are running out of room to shield consumers from higher energy prices, with fuel subsidies potentially costing more than $1 trillion this year, according to a United Nations study.

In Europe, the Stoxx 600 has climbed 0.7% after three days of losses, with technology stocks leading gains. Still, Europe is set for a weekly drop, the fourth in five weeks. as bond markets remained under pressure from inflation concerns. IG Group slumped after it issued an unscheduled third-quarter update. Here are the biggest movers Friday:

• Universal Music Group shares rise as much as 3.3% after an upgrade to overweight at Barclays. The music label company’s stock is inexpensive for the first time after a period of underperformance, according to the bank
• Hensoldt shares rise as much as 5.2% as the German defense firm is upgraded to buy from hold by Kepler Cheuvreux, which says earnings and order momentum are poised to accelerate
• BT shares rise as much as 4.4% on Friday after the Financial Times reported that the telecom firm has opened talks with UK government officials over the possibility of buying TalkTalk
• J D Wetherspoon shares rise as much as 8.9%, to the highest level since March 2022, as analysts are encouraged by robust current trading, boosted by favorable weather
• IG Group falls as much as 27%, the most since 2016, after an unscheduled third-quarter update in which it cut its 2026 revenue growth outlook to the mid-single digits from 10%-15%
• Sanofi falls as much as 4.6%, the most since July, as Citi flags skepticism surrounding the French drugmaker’s announcement yesterday of an expanded partnership with Regeneron
• Kering falls as much as 6.5% as JPMorgan flags a tougher luxury backdrop and slower Chinese recovery for the French luxury-goods company after discussions with Kering’s investor relations team
• European sportswear stocks are sliding this morning after US firm Nike fell in extended trading on Thursday, following weaker-than-expected quarterly sales and a disappointing outlook for full year revenue. Analysts at Vital Knowledge described the sales guidance as “pretty ugly”

For Europe, “the key issue from a monetary policy perspective is any adverse spillovers from higher energy prices,” noted Pia Fromlet and Marcus Widen at SEB. “The test for how strong this effect will be is still ahead of us. Up until October the narrative of little evidence of indirect effects remains.”

Asian stocks fell to head for their worst week since mid-July, pressured by rising yields and US troop deployment concerns in the Middle East. The MSCI Asia Pacific Index was down as much as 1% on Friday before paring some of the losses. The gauge is still on track to close the week down 1.1%, the most since the week ending July 17. The stock markets in Hong Kong and Japan slumped, while South Korea and Taiwan gained.    Hong Kong was the region’s worst-performer, down the most since March, as investors fretted over tech companies’ potentially higher borrowing costs. Alibaba, Tencent and Xiaomi were some of the lead decliners in the Hang Seng Index.  Asia’s bank stocks, including HSBC, were also trading lower, tracking moves in global peers amid concerns over higher yields and potential UK tax hikes targeting the sector.

In FX, the Bloomberg Dollar Spot Index is down 0.4%. The Japanese yen and Swiss franc are the best performing G-10 currencies, rising 0.3% each.

In rates, treasuries hold small gains in early US session led by intermediate- to long-end tenors, slightly flattening the curve. US 10-year yield is down about 2bp near 5.22% vs declines of 9bp and 7bp for German and UK counterparts; European government bonds rallied out the gate this morning and remain in the ascendancy as a drop in oil prices provides an additional tailwind.  French 10-year is about 3bp cheaper on the day.  Bunds and gilts outperform amid lower oil prices and haven bid as French bonds weaken. IG dollar issuance slate is blank so far and expected to remain quiet. Weekly volume stands at about $33 billion vs dealers’ $50 billion projection; they anticipate $100 billion of supply in October. US session features September jobs report at 8:30 a.m. New York time. 

In commodities, Brent crude futures have fallen 3% to around $99 a barrel while WTI crude oil futures, down nearly 4%, support European bonds as France proposed developed nations release strategic reserves to ease surging prices at the pump. Precious metals are heading higher while Bitcoin has added 2%.

Today’s US economic data slate also includes August factory orders 10 a.m. Fed speaker slate includes Dallas’s Logan (10 a.m.) and Chicago’s Goolsbee (12 p.m.)

Market Snapshot

Top Overnight News

• Iran is preparing a broader and more forceful response if the United States resumes large-scale military attacks, sources said, while continuing a diplomatic push that Iranian officials privately see as unlikely to succeed. RTRS
• Vladimir Putin has instructed his military leaders to abandon the rules of war, prompting a steep increase in strikes on civilian targets amid a major push to regain the advantage in the conflict, according to intelligence intercepted by Kyiv. FT
• Governments around the world are running out of room to shield consumers from higher energy prices resulting from the Iran war and other crises, with fuel subsidies potentially costing more than $1 trillion this year, a United Nations study found. BBG
• World food prices rose in September, as transportation disruptions and weather concerns limited supplies and lifted prices for several crop-based commodities, the United Nations’ Food and Agriculture Organization said. WSJ
• Amazon’s exploring a deal to shift about $8 billion of high-end Nvidia chips into a sale-leaseback SPV vehicle backed by outside investors to help strengthen its balance sheet. FT
• European countries are in crisis talks over the release of diesel stocks, as the US threatens them with a diesel export ban unless they release strategic reserves of the oil product. FT
• Tokyo’s key inflation gauge rose sharply as the effects of some temporary government measures faded, backing the Bank of Japan’s stance on continuing to raise the benchmark rate after authorities accelerated the pace of policy normalization. BBG
• Eurozone CPI for Sept ran hot on the headline (+3.8% vs. the Street +3.7% and vs. +3.2% in Aug) and was inline on core (+2.5% vs. +2.4% in Aug). BBG
• Trump posted “Republicans in the Senate have to get moving on what I call the “No More Changing of Clocks Act,” officially known as The Sunshine Protection Act”.
• Goldman estimates nonfarm payrolls rose by 80k in September, slightly below consensus of +88k. On the positive side, the level of layoffs remains low and big data indicators of job growth picked up sequentially. On the negative side, September payroll growth has tended to underperform its recent trend when Labor Day is later in the month—like it was this year—and last month’s sharp increase in nonfarm payrolls was boosted by outsized increases in leisure and hospitality and local educational services payrolls that we do not expect to repeat. GS Research
• BofA Flow Show (w/e 30th September): USD 18.8bln to bonds, 15.8bln to stocks, 0.9bln to crypto, 0.7bln to gold, 118.0bln from cash on quarter-end; Bull and Bear indicator 8.8 (prev. 9.3).

A more detailed look at global markets courtesy of Newsquawk

APAC stocks traded mixed following the ultimately choppy performance stateside as oil prices climbed, yields pulled back, and participants digested a slew of data, while all eyes turn to the looming NFP report. ASX 200 mildly gained, with the index led by strength in tech and energy, albeit with further upside capped amid a lack of fresh catalysts and with real estate and healthcare at the other end of the spectrum. Nikkei 225 retreated as participants digested the latest data releases, including a surprise uptick in the Unemployment Rate and the hotter-than-expected Tokyo CPI data, which was said to be driven by an unwinding of price suppression effects from targeted government subsidies. KOSPI traded indecisively following the somewhat mixed South Korean CPI data, in which the Y/Y reading slowed to 2.9% from 3.1%, as expected, but remained above the central bank’s 2% target. Hang Seng underperformed on return from the holiday closure, with Stock Connect trade remaining shut owing to the week-long closure in the mainland, while pressure was seen in auto names following monthly sales updates and with casino stocks in the red after Macau casino revenue declined last month.

Top Asian News

• Japanese Economy Minister Kiuchi said Japan is no longer in deflation, so there is no need for excessively loose monetary policy that favours higher inflation, while he added that the Takaichi administration’s policy is different from reflationary policy that aims to pull Japan out of deflation, and is different from Abenomics in that it seeks to achieve both a strong economy and fiscal discipline and focuses on boosting Japan’s supply capabilities.
• Japanese Tokyo Core CPI (Sep YY) 2.7% vs. Exp. 2.4% (Prev. 1.8%).
• Japanese Tokyo CPI (Sep YY) 2.7% vs. Exp. 2.5% (Prev. 1.9%).
• Japanese Tokyo CPI Ex Food and Energy (Sep YY) 3.0% vs. Exp. 2.5% (Prev. 2.0%).
• South Korean CPI (Sep YY) 2.9% vs. Exp. 2.9% (Prev. 3.1%).
• South Korean CPI (Sep MM) 0.3% vs. Exp. 0.4% (Prev. 0.2%).

European bourses (STOXX 600 +0.9%) are firmer across the board as they pare back some of Thursday’s losses. A pullback in energy prices seems to be supporting equities, with recent Reuters reporting that France is proposing to release 50mln barrels of diesel from Europe and 50mln barrels of crude oil across IEA members, further weighing on the crude complex. Sectors highlight the clear positive bias. Tech leads sectors higher, with Basic Resources and Travel & Leisure following suit, while Health Care is the sector laggard.

Top European News

• BoE Decision Maker Panel (Sep): Year-ahead CPI inflation expectations 3.1% (prev. 3.1%), Three-year-ahead CPI inflation expectations 2.8% (prev. 2.8%), expected wage growth remained at 3.4%.
• UK PM Burnham is reportedly leaving the door open to a snap general election next year, according to The i Paper.
• Moody’s said France’s ability to tackle key policy difficulties despite political fragmentation is a key factor for the resolution of the negative outlook.
• European HICP (Sep YY) 3.8% vs. Exp. 3.6% (Prev. 3.2%); Services 3.2% (prev. 3%).
• European HICP (Sep MM) 0.6% (Prev. 0.4%).
• European Core HICP (Sep YY) 2.2% (prev. 2.1%).
• European HICP Ex Food, Energy & Tobacco (Sep YY) 2.5% vs. Exp. 2.5% (Prev. 2.4%).

FX

• G10s are broadly firmer against the USD, which has been pressured alongside pressure yields and pressure in the energy complex. That was facilitated by reports that France has proposed plans to release 50mln barrels of diesel from Europe (vs the US request of 120mln over 180 days), and perhaps more pertinently 50mln barrels of crude oil across IEA members – this would include the US.
• Given the recent pressure in yields, the index is under mild pressure this morning and currently holds towards the lower end of a 101.79 to 102.13 range – but still around the prior day’s peak. A material bout of pressure for the USD would likely require significant progress between US-Iran and/or confirmation of a crude stock release. Bar that, the index will likely trade tentatively around the current range as markets await US NFP later today. The US economy is expected to add 90k nonfarm payrolls in September. Analysts note that the August data, where 162k payroll additions were reported, may have been subject to favourable seasonal adjustments, and will be watching to see if the data is revised lower in September. The unemployment rate is expected to hold at 4.1%, an expectation supported by the Chicago Fed’s flash real-time unemployment rate forecast. (A full preview can be found in the Newsquawk Research Suite).
• CHF is the outperformer across G10s this morning, extending on recent gains. There appears to be a bit of an unwind of the recent carry trade that the CHF was subject to, with net positioning of long-shorts at c. -16.45k over the past 3 months. Further helping is some haven-related demand stemming from the French fiscal situation.
• Elsewhere, JPY also holds towards the top of the G10 pile, also buoyed by the yield situation. Domestically, Tokyo CPI accelerated in September, and broadly topped expectations. A report which will no doubt boost calls for the BoJ to hike; it seems like the BoJ is now dealing with waning sentiment across Japanese businesses (evidenced in the latest Tankan survey), and rising inflation in a key leading indicator.
• EUR is a touch firmer this morning, with focus ultimately on the region’s inflation report. Headline Y/Y printed at 3.8% (exp. 3.6%, prev. 3.2%), and Services also rose from the prior. Pertinently, Core HICP moved only a touch higher to 2.2% (prev. 2.1%), which will be welcomed for policymakers, since there is still little evidence of second-round effects. Nonetheless, woes of rising inflation remain – and this data will only further cement calls for another hike later this year

Fixed Income

• A modestly firmer start to the day has extended into one of marked gains across EGBs and Gilts, with the bulk of the move following a constructive report on energy supplies.
• However, while a touch firmer, USTs have not really budged from the unchanged mark, into an afternoon dominated by the September NFP report. In brief, the headline is seen at 90k while the August figure of 162k could be subject to a downward revision after potential distortion from seasonal adjustments. For the Fed, the data isn’t expected to have a significant impact as long as it doesn’t change the broad description of a stable and close to full employment labour market, with inflation very much the focus point.
• Back in Europe, Bunds peaked at 121.37, notching a new high for the week and on track to close the week out with gains of c. 150 ticks (100 of that is from today, at the time of writing), the first positive weekly return since August. While the reported energy stockpile releases will be welcome in the immediacy, it does not change the US-Iran picture, supply risk through Hormuz and the usage of stockpiles now could have a knock on effect during winter. Though, the El Nino will see warmer weather may push any cold spell to later in the season, potentially giving the region some stockpile breathing room.
• EGBs generally trade with the above. For France, OATs hit a 108.76 peak, firmer by 36 ticks at best, but at the lower-end of the WTD 108.02-110.36 band, after the poorly received draft budget. This morning, Moody’s updated on the draft plan and highlighted the clear fiscal and political risks facing France, points that dominate thinking in the French bond space. Reflecting this, the OAT-Bund 10yr yield spread peaked at 146bps this morning, vs 110bps at the start of the week. No real move to the September Flash HICP, with energy once again driving the upside but no overt signs of second round effects as the core components remain at acceptable levels; though, the absolute level means further tightening remains a valid call.
• Gilts also benefit from the energy moves. At an 84.81 session high, firmer by c. 100 ticks at best and set to end the week at highs.
• Australia sells AUD 1.2bln 4.50% April 2033 bonds: b/c 3.00x, avg. yield 5.108%.

Commodities

• WTI Nov and Brent Dec futures are sharply lower after yesterday’s rally, with pressure intensifying during the European morning on reports France proposed releasing 50mln bbls of diesel from Europe alongside 50mln bbls of crude across IEA members. The proposal would be conditional on a US commitment not to impose a unilateral diesel export ban and follows Washington’s request for major European countries to release diesel reserves. WTI fell from USD 90.80/bbl to USD 89.88/bbl on the report, while Brent fell from USD 100.90/bbl to USD 99.76/bbl. European gasoil futures fell over 4% on the reports. Prior to this, the complex was already under pressure despite continued US-Iran tensions, with Trump reportedly telling aides he expects bombing of Iran to resume in November and the Pentagon sending a third carrier strike group to the region. WTI and Brent currently trades at session lows, with the former briefly falling below the USD 89/bbl mark while the latter touches the USD 99/bbl handle.
• Dutch TTF is also softer despite continued European energy-security concerns heading into winter, with attention dominated by discussions around coordinated energy-stock releases. TTF trades towards the lower end of a EUR 71.05-73.61/MWh range.
• Precious metals are firmer ahead of US NFP, helped by the pullback in oil prices and some reprieve in global yields. Spot gold trades towards the upper end of a USD 4,134-4,197/oz range, having recovered further from yesterday’s USD 4,139/oz low, while spot silver is similarly firmer within a USD 60.22-61.56/oz range.
• Base metals were subdued overnight with mainland China still absent for the week-long holiday, but have since clambered into the green on the aforementioned pullback in energy and subsequent boost to risk. 3M LME copper trades in a USD 14,243.03- 14,380.38/t range at the time of writing.
• EU countries discussed a French proposal to release 50mln barrels of diesel from Europe and 50mln barrels of crude oil across IEA members, in response to the US’ threat of a diesel export ban, Reuters reported citing sources. The report added that any agreement on further stock releases should include a US commitment to avoid a unilateral diesel export ban.
• France’s Elysee said President Macron spoke with US President Trump about energy and fuel prices.
• European Commissioner Jorgensen said the EU is discussing with all IEA members, not only the US, when it is time to release diesel stocks.
• Ukrainian Agricultural Minister said that the area planted to winter wheat in 2027 could decline about 17%.

Trade/Tariffs

• US President Trump said the trade deficit with China has dropped to the lowest in 44 years and that he gets along great with Chinese President Xi, while he added that China used to rip the US badly and that Canada is ripping the US badly.

Central Banks

• Fed’s Logan (2026 voter) said the policy rate needs to increase an additional 50bps or more and that without higher rates, inflation will not get to the 2% goal, while she added that policy is not sufficiently restrictive and needs to become modestly tighter. Logan said price stability must be restored and at a minimum, several further rate hikes would reverse last autumn’s cuts. She also stated that it remains uncertain how high the policy rate must go to bring inflation back towards 2%.
• Fed’s Bowman (voter) said she sees no urgent need for more rate moves this year, while she touted benefits of a Fed capital plan tied to treasuries.
• ECB’s Rehn told Econostream that ECB forecasts are facing extremely high and widespread uncertainty and that the energy surge is nearer to the adverse scenario. Rehn added that one uncertainty is that market sentiment toward AI could reverse suddenly, while higher long-term rates will slow economic growth and reduce the pass-through of energy shocks to prices and wages.

Geopolitics: Iran

• US President Trump reiterated that Iran will never have a nuclear weapon and has no navy or army, while he stated that Iran has not been able to get one of its vessels through the Strait of Hormuz for months. Trump also said huge quantities of oil have passed through the Strait of Hormuz and the US is taking out millions of barrels of oil, claiming that in some cases, it is more than before the war.
• US President Trump said the Iran war will be ending soon, one way or the other, and that it looks like Iran was involved in the UK base incident. Trump warned that Iran will be hit very hard if it is behind the copilot who tried to crash a flight to Israel, while he separately commented that based on what he heard, Iran was connected to the attempted attack on the plane.
• The Iranian National Security Commission said that Iranian management of the Strait of Hormuz will be applied. Ships to Zionist or hostile regimes will not be able to pass through the Strait, others will have to get permission. Bill is queued for parliament.
• IRGC said three UAE-linked tankers attacked recently in the Strait of Hormuz were on the PGWA’s non-compliance list, and had transited the Strait repeatedly over the past two months.
• Saudi‑led coalition intercepted and destroyed ballistic missiles launched by Yemeni Houthis towards Khamis Mushait.

Geopolitics: Other

• Russia’s Kremlin said Russia will continue operations to completely stop supply of weapons and fuel for the Ukrainian military via the Black Sea.
• Russia’s Defence Ministry said they struck a vessel in the Black Sea and an industrial production complex at the port of Izmail in Ukraine’s Odessa region overnight, according to IFX.
• South Korean President Lee said they will take additional measures if Ukraine continues to deny the agreement on North Korean prisoners of war repatriation, while he called on Ukraine to acknowledge the agreement and apologise.

US Event Calendar

DB’s Jim Reid concludes the overnight wrap

Markets stumbled yesterday as we began Q4, with mounting signs of financial stress focused on Europe. In fact, the daily moves were reminiscent of the Euro crisis in many respects, with sovereign contagion a big talking point. For instance, the Franco-German 10yr spread (+13.9bps) saw its biggest daily jump since March 2020 at the height of the Covid turmoil, the same day that ECB President Lagarde said “we are not here to close spreads”. And over in Italy, the 10yr spread to bunds (+15.9bps) saw its biggest daily jump since July 2022, the day that the ECB delivered their first rate hike in over a decade. Moreover, the impact cascaded across different asset classes, with the Euro (-0.76%) posting its worst day against the dollar since June, whilst the STOXX Banks index (-3.90%) had its worst day since March.

The interesting thing about yesterday’s moves was that there wasn’t a single catalyst driving them. Initially, the day began with a genuinely global bond selloff, driven by higher oil prices and a hawkish batch of US data. Indeed, the 10yr US Treasury yield hit its highest intraday level since 2002, at 5.34%. But as the session went on, it then morphed into a classic risk-off move, with bunds and US Treasuries starting to rally, whilst others like French OATs and Italian BTPs sold off. That went hand in hand with mounting stress for risk assets too, particularly in the affected markets. So France’s CAC 40 (-1.62%) hit a 6-month low, and Italy’s FTSE MIB Index (-2.21%) hit a 3-month low, underperforming the Europe-wide STOXX 600 (-1.30%). French banks came under pressure, with Société Générale (-5.00%), Crédit Agricole (-3.70%) and BNP Paribas (-3.64%) losing significant ground, and this was broadly in line with the broader STOXX Banks (-3.90%) as contagion spread through European markets. Credit took a big hit as well, with European HY spreads (+18bps) seeing their worst session since the start of the Iran war, reaching their widest level in six months.

That financial stress led to growing doubt whether central banks like the ECB could hike rates as aggressively as thought. After all, tighter financial conditions would do some of the work for them in bringing down inflation, and the selloff also raised doubts as to whether the economy could cope with another hike. So when it came to ECB pricing, the number of further hikes priced by December’s meeting fell -6.1bps on the day to 23.5bps. Or in other words, another ECB hike is no longer fully priced by year-end. So that led to a huge collapse in front-end German yields, with the 2yr German yield (-14.2bps) falling back to 3.07%, its biggest drop since April. Meanwhile, the 10yr bund yield (-7.8bps) also fell back to 3.51%.

For Europe, those issues were exacerbated yesterday by the latest rise in energy prices, which hit the continent more given it’s an energy importer (unlike the US nowadays). So Brent crude was up +4.37% by the close to $102.31/bbl, whilst European natural gas futures were also up +2.18%. In part, that followed comments from President Trump, who said in a Time interview that it was “possible” he would resume bombing Iran once the midterm elections had passed. In addition, there were further reports about US military deployments in the Middle East, with Bloomberg reporting the US was sending an additional aircraft carrier, along with 10,000 sailors and Marines to the Persian Gulf. So coupled with the absence of any progress towards a deal, this led to growing pessimism that free shipping via the Strait of Hormuz would resume anytime soon. And in turn, that pushed longer-dated oil futures higher once again, with the June 2027 Brent future up to a new high yesterday of $88.03/bbl by the close.

Whilst European assets struggled yesterday, there was a very different tone in the US. Initially, it looked like Treasury yields would hit new highs, and we did see the 10yr yield hit its highest intraday level since 2002 yesterday, at 5.34%. But that turned in the afternoon, with the 10yr yield ultimately down -4.4bps on the day to 5.24%. Moreover, US equities recovered from their earlier sell-off, with the S&P 500 (+0.19%) ending a run of three consecutive declines, whilst futures for the index are up another +0.27% this morning.

In part, those moves were aided by more dovish commentary from FOMC officials, which added to the sense that officials weren’t in a rush to hike again. So that meant the 2yr Treasury yield (-9.6bps) saw its biggest daily decline since July, closing at 4.79%. Those comments included Vice Chair Jefferson’s, who suggested that deciding on future rate hikes “may take more time”, while Governor Bowman (one of the more dovish voices on the FOMC) said she did not “currently see an urgent need for further action”. That left an October Fed hike just 30% priced by yesterday’s close, down from 37% on Wednesday and 70% on Monday before NY Fed President Williams similarly signalled no urgency for the next hike.

What was also striking was how the financial stress and the Fed commentary outweighed a hawkish batch of US data, which initially put upward pressure on Treasury yields earlier in the day. Collectively, that data painted a picture of ongoing resilience in the US economy, alongside plenty of price pressures, so it was very much in line with the prints of recent weeks. Among others, the weekly initial jobless claims fell to a 10-week low of 197k in the week ending September 26 (vs. 200k expected). Then the continuing claims for the previous week fell to a three-and-a-half-year low of 1.701m (vs. 1.725m expected). And just 90 minutes after that, the ISM manufacturing print came in at 54.5 in September (vs. 55.0 expected), but the prices paid subcomponent surged more than expected to 77.9 (vs. 73.0 expected) and the employment component rose more than anticipated to 52.7 (vs. 52.0 expected). So initially that drove yields higher, but the wider risk-off move then saw that reverse course.

With all that in mind, today’s focus will now turn to the US jobs report for September, which is out at 13:30 London time. Clearly, the monthly jobs reports are always a macro highlight, but this is an important one, as the continued data resilience has been a huge factor supporting US risk assets, and it’s also given the Fed space to start hiking rates. Indeed, last month’s report was very strong, with payrolls up +162k alongside positive revisions to the previous two months. So that added to the hawkish momentum leading up to the Fed’s September meeting a couple of weeks later. This time around, our US economists are expecting payrolls to come in at +60k, with the unemployment rate holding steady at 4.1%.

Ahead of that jobs report, Asian markets have also generally lost ground overnight, with the Hang Seng (-2.64%) sharply lower as it returns after the previous day’s holiday. Then in Japan, the Nikkei is down -0.94%, which comes as the Tokyo CPI data for September was faster than expected. That showed headline CPI rising to +2.7% (vs. +2.5% expected), whilst the core-core measure reached its fastest in over a year, at +3.0% (vs. +2.5% expected). Otherwise in South Korea, the KOSPI is up +0.26% this morning, and the country’s CPI eased to +2.9% in September, in line with expectations. In mainland China, markets are still closed for a holiday.

Looking at the day ahead now, the data highlights will include the US jobs report for September, and the Euro Area flash CPI print for September. From central banks, we’ll hear from the Fed’s Logan, and the ECB’s Moulin, Cipollone, Rehn, Sleijpen, Vujcic and Nagel.