The US economy added just 29,000 jobs in September, marking a sharp deceleration in hiring that has prompted investors to reassess expectations for further interest rate increases. According to PBS NewsHour, the unemployment rate rose to 4.2% from 4.1% in August, while wage growth slowed to 3% annually, down from 3.1% the previous month. The weaker-than-expected employment figures have triggered a rally in equity markets, with the Nasdaq Composite climbing to an all-time high.
The US Bureau of Labor Statistics reported that nonfarm payroll employment increased by 29,000 in September, substantially below the 90,000 new positions economists had anticipated. The disappointment extended to prior months: August's jobs report was revised downward to show 133,000 positions created rather than the initially reported 162,000, while July's figures were revised down by 31,000, revealing that the US economy actually shed 10,000 jobs that month. According to PBS NewsHour, the combined July and August payroll figures were revised down by 60,000 jobs in total.
Why are markets rallying on bad jobs news?
Investors have interpreted the softer employment data as a signal that the Federal Reserve may pause or moderate its campaign to raise interest rates. Susannah Streeter, chief investment strategist at Wealth Club, explained the market sentiment:
There's been a ripple of relief on financial markets as hopes rise that the Fed won't have to go so hard and fast in raising interest rates. Treasury and gilt yields have eased off, and equity markets are on a rising tide, as the rush of worry has started to recede.
The probability of a rate increase at the Federal Reserve's October meeting has collapsed to just 20.5%, down from 24.4% the previous day and 64% a week earlier, when market confidence in a policy tightening was substantially higher. According to CNBC, the Nasdaq Composite rose 1.7% to a record, while the S&P 500 gained 1.1% and the Dow rose 0.6%.
What do economists make of the employment figures?
Nancy Vanden Houten, Lead US Economist at Oxford Economics, acknowledged the softer data while maintaining that rate increases remain likely:
The softer than expected September employment report makes a rate hike at the October meeting a closer call. However, we think the upside risks to inflation are still a bigger concern for the Federal Reserve and expect they will raise rates at the end of the month. Nonfarm payrolls rose 29,000 in September and there were downward revisions to job gains for July and August. Still, on a trend basis, job growth is well in line with our estimate of the breakeven pace of job growth. The unemployment rate edged up to 4.2% in September as the prime-age labor force participation rate continues to recover some of the plunge that occurred in June. Looking ahead, we expect the unemployment rate to hold steady around 4.2% with the risk skewed to the downside as labor force growth continues to slow.
Seema Shah, chief global strategist at Principal Asset Management, took a more dovish view:
A softer-than-expected jobs report should put an October Fed hike firmly on the back foot. Weaker payrolls, softer wage growth and a higher unemployment rate all point to a labour market that's cooling rather than reaccelerating. That should take some steam out of Treasury yields and reduce the urgency for the Fed to act. CPI remains the decisive release, but today's data argues for patience, not panic. The Fed needs to see a reacceleration in inflation, not just resilience in growth, to justify another hike this year.
Bradley Saunders, North America economist at Capital Economics, characterised the employment picture as mixed:
The softer employment gain and tick up in the unemployment rate in September is not enough to spoil the image of a labour market which is broadly performing well, though it may help to trim investors' expectations for how far the Fed will eventually tighten back towards our view for two more rate hikes.Saunders noted that a 17,000 decline in government payrolls partly explained the weakness, and suggested that the softer 23,000 rise in healthcare and social assistance employment may have been linked to the Trump administration's decision to rescind Temporary Protected Status and working authorisation for 350,000 migrants.
Where were jobs created or lost?
Healthcare remained the strongest employment sector, with hiring increasing by 17,000 in September across ambulatory health care services and hospitals. Construction employment rose by 11,000, while manufacturing gained 9,000 positions. Financial activities, by contrast, shed 7,000 jobs. Employment showed little change across mining, quarrying and oil and gas extraction; wholesale trade; retail trade; transportation and warehousing; information technology; professional and business services; social assistance; leisure and hospitality; other services; and government.
How are bond markets responding?
US Treasury prices have risen as investors reassess the outlook for Federal Reserve policy, pulling yields lower from the multi-year highs reached earlier in the week. The yield on 10-year US Treasuries fell by 6 basis points to 5.174%, retreating from the 24-year high recorded the previous day. The 30-year US Treasury yield declined by 4.5 basis points to 5.568%. This repricing reflects the market's expectation that a weaker jobs market will constrain the Fed's ability to raise rates further in pursuit of its dual mandate of price stability and full employment.
What impact is this having on UK mortgages?
UK mortgage rates have reached their highest levels in more than two years, driven by earlier turbulence in bond markets. The average two-year fixed residential mortgage rate climbed to 5.96% on 2 October 2026, up from 5.93% the previous day and the highest since 30 June 2024, according to Moneyfacts data. The average five-year fixed residential mortgage rate rose to 5.98%, up from 5.95% and marking the highest level since 29 September 2023.
What is the G7 doing about fuel prices?
In a coordinated response to surging energy costs, the Group of Seven nations has agreed to release as much as 100 million barrels of emergency oil and diesel reserves. The move follows sustained pressure from the Trump administration to address rising fuel prices. Emmanuel Macron, France's president, announced that the release will be implemented over the next four months and coordinated by the International Energy Agency.
We will implement our commitments with a coordinated release through the IEA of 100 million barrels to begin immediately over 4 months, including a frontloaded substantial diesel release within the first 20 days by G7 members and partners.
According to the Independent, the G7 package also calls for coordinating refinery maintenance, temporarily increasing refinery use where feasible, and avoiding restrictions on energy-product trade between partner countries. The effort aims to ease inflationary pressure that has pushed bond yields higher this week. According to Yahoo News, US diesel averaged $6.37 a gallon on 2 October 2026, after reaching a record $6.52 on 22 September.
How are European markets performing?
Stock markets in the eurozone have recovered some of the previous day's losses despite a jump in inflation figures. Germany's DAX index gained 1.1%, while France's CAC index rose 0.8%. Traders have been reassured by a decline in the oil price, with Brent crude down around 2.4% to $99.87 a barrel.
Analysts Bill Diviney and Adrian Quinn at ABN Amro predict that high fuel prices will push eurozone inflation to 4% by the end of the year:
We expect inflation to continue to move higher over the coming months, although the biggest of the rises is probably behind us with today's release. Our base case assumes energy prices stay elevated well into 2027, and the broadening pass-through from energy to other categories is expected to push inflation to a peak of a little over 4% by the turn of the year. The still-rising inflation trajectory alongside the continued diplomatic failure to fully resolve the energy supply crunch is likely to keep the ECB's Governing Council hiking rates over the coming months. We expect two additional rate hikes by the ECB, ultimately taking the deposit rate to 3%.
What about wage growth?
The slowdown in workers' earnings growth presents a political challenge for the Trump administration ahead of next month's midterm elections. September's average hourly earnings were 3.0% higher than a year earlier, down from 3.1% in August. Nic Puckrin, a former Goldman Sachs analyst, characterised the employment report as concerning:
Today's ice-cold report shows the jobs market may not be as healthy as previous data might have suggested. Wage growth is more anaemic than expected at 3%, while payrolls came in well below expectations at 28,000, with August also revised down. This is a fly in the ointment for the Fed: it's forcing the central bank to choose between two evils. Hike again, and you risk tipping the scale on unemployment at a time when Americans are already struggling with the cost-of-living crisis. Hold, and inflation could get out of control.
How is the dollar reacting?
The US dollar has weakened against major currencies following the employment report. The greenback declined 0.5% against the Japanese yen to ¥157.23 per dollar and lost 0.15% against sterling, which strengthened to $1.322. The dollar index, which tracks the currency against a basket of other major currencies, fell 0.25%.
What happens next?
The Federal Reserve's next scheduled policy meeting is set for 27–28 October 2026. Market participants will be closely monitoring inflation data and any further employment reports before that decision. The outcome will likely determine whether the central bank proceeds with another rate increase or pauses its tightening cycle in response to the cooling labour market.
Wall Street is positioned to rally when trading begins, with the Dow Jones industrial average forecast to rise 0.85% according to futures market pricing, and the tech-focused Nasdaq 100 up 1% in pre-market trading.
Key Facts:
- US nonfarm payroll employment rose just 29,000 in September, well below the 90,000 forecast by economists
- The unemployment rate increased to 4.2% in September from 4.1% in August
- July and August jobs figures were revised down by a combined 60,000 positions
- The probability of a Federal Reserve rate increase in October has fallen to 20.5% from 64% a week ago
- The G7 has agreed to release 100 million barrels of emergency oil and diesel reserves over four months to address rising fuel prices
