CMSC: September US nonfarm payrolls significantly below expectations, October Fed rate hike expectations cool

CMSC released a research report stating that the U.S. Bureau of Labor Statistics reported that U.S. nonfarm payrolls added 29,000 jobs in September 2026, versus an expected gain of 90,000 and a previous gain of 133,000; the unemployment rate came in at 4.2%, versus an expected 4.1% and a previous 4.1%. September's nonfarm payroll gain was significantly below expectations, with the pullback in local government employment from a high base being the core factor; in addition, employment gains in leisure and hospitality fell notably again from the previous month, while information, professional and business services, and financial activities continued to be an absolute drag. The previously released August PCE data coming in below expectations had already significantly reduced market concerns about inflation, and after the release of the nonfarm data, the market further lowered its expectations for a rate hike at the October FOMC. Following the data release, CME data showed that the market's expectation for the October FOMC to keep the policy rate unchanged rose to 80%, but it still priced a 25bp hike in December as the highest-probability scenario. I. Key Overseas Economic Data 1. U.S. August PCE price index rose much less than expected year over year On September 30, 2026, the U.S. Bureau of Economic Analysis (BEA) under the Department of Commerce released the August personal consumption expenditures (PCE) price index. The headline PCE price index rose 3.4% year over year in August, and the core PCE price index rose 3.0% year over year, below market expectations of 3.7% and 3.3%, respectively; on a month-over-month basis, they rose 0.3% and 0.2%, respectively. At the same time, the BEA extended annual revisions back to 2021, but a comparison before and after the revisions showed that the largest changes were in readings since 2026, with both headline and core PCE year-over-year growth rates after revision noticeably lower than before revision. An important reason for the below-expectation reading was the BEA's annual revision of the PCE data, with the revisions mainly reflected in three components: financial services, legal services, and computer software and accessories. 1) In financial services, for portfolio management and investment advisory services, the old method inferred current-price estimates from revenue data and deflated them using the producer price index, but the two did not consistently reflect changes in asset values and fee rates, causing unverifiable fluctuations in the estimate of service volume. The new method instead uses employment and hours data to directly extrapolate service volume, with the price index derived implicitly, in order to reduce abnormal fluctuations. 2) In legal services, the legal services CPI used under the old method had for the most part not been publicly released since 2023, and the unpublished values subsequently used did not meet BLS release quality standards and were abnormally volatile. The BEA therefore replaced the original CPI with a composite price index based on multiple producer price indices. 3) In computer software and accessories, the composition of the old CPI was mismatched with the actual scope of this consumption category in the national accounts: the CPI included flash drives, blank media, and other accessories that belong to hardware and are not part of the NIPA software and accessories consumption category; at the same time, items in the NIPA category such as game software publishing and application service provision were not covered by the CPI. The BEA therefore switched to a composite price index, combining the computer software and accessories CPI with producer price indices for game software publishing, hosting, and IT infrastructure services by weight, to better reflect the composition of this category. This data revision led to a cooling of market rate hike expectations. For the Fed's subsequent decisions, this revision should have a marginal impact; core PCE is an indicator that the Fed and Warsh pay relatively close attention to, and the easing of pressure in the data can also provide additional grounds for pausing rate hikes, but it is unlikely to become a decisive factor in the subsequent rate hike path. 2. U.S. Q2 GDP growth revised up substantially On September 30, 2026, the U.S. Bureau of Economic Analysis released the third estimate of real GDP for the second quarter of 2026. The data showed that real GDP grew at an annualized quarterly rate of 2.2% in the second quarter, revised up by 0.7 percentage points from the second estimate (both the initial and second estimates were 1.5%). According to the BEA's technical note, the upward revision mainly came from consumer spending, private investment, and government spending. 1) Within consumer spending, services and goods were both revised up. On the services side, the revision was driven by upward revisions to recreational services and other services, partly offset by downward revisions to transportation services, especially air transport. On the goods side, the revision was driven by upward revisions to recreational goods and vehicles, especially information processing equipment. 2) The upward revision to private investment mainly reflected upward revisions to private inventory investment and private fixed investment. In inventory investment, nonfarm inventory investment and Shenzhen Agricultural Power Group inventory investment were revised up. In fixed investment, nonresidential structures and residential investment were revised up, especially the revision related to nonresidential investment in commercial and medical data centers. 3) The upward revision to government spending mainly concerned federal defense spending, reducing the negative drag of government spending on GDP. This revision, by incorporating more consumer, investment, and government spending factors, more fully reflects the current resilience of the U.S. economy. Against the backdrop of high inflation but monetary policy not yet tightened, household consumer spending was still revised up, indicating that demand for services and goods consumption has not weakened significantly. The upward revision to nonresidential construction investment, especially data center-related investment, shows that AI capital expenditure is becoming an important support for private investment. Consumer resilience and AI capital expenditure together strengthened the economic growth momentum in the second quarter and also eased market concerns about the risk of a short-term U.S. recession. 3. September nonfarm payrolls came in below expectations On October 2, 2026, the U.S. Bureau of Labor Statistics (BLS) reported that U.S. nonfarm payrolls added 29,000 jobs in September 2026, versus an expected gain of 90,000 and a previous gain of 133,000; the unemployment rate came in at 4.2%, versus an expected 4.1% and a previous 4.1%. September's nonfarm payroll gain was significantly below expectations, with the pullback in local government employment from a high base being the core factor; in addition, employment gains in leisure and hospitality fell notably again from the previous month, while information, professional and business services, and financial activities continued to be an absolute drag. The September nonfarm data can be seen as a phased correction to the overly strong August performance. The rebound in the labor force participation rate pushed the U3 unemployment rate slightly higher, and wage growth weakened, but the decline in the U6 unemployment rate indicates that the job market still has some resilience. The local government and leisure and hospitality components continued to cause large disturbances to the overall data, but excluding the interference from these two items, whether the continued upgrading of AI applications will lead to further weakening of service-sector employment is an issue that needs close attention in the next stage. The previously released August PCE data coming in below expectations had already significantly reduced market concerns about inflation, and after the release of the nonfarm data, the market further lowered its expectations for a rate hike at the October FOMC. Following the data release, CME data showed that the market's expectation for the October FOMC to keep the policy rate unchanged rose to 80%, but it still priced a 25bp hike in December as the highest-probability scenario. 4. U.S. manufacturing PMI and services PMI in September were both clearly above the boom-or-bust line In September 2026, both the U.S. manufacturing and services PMIs were in expansion territory and remained substantially above the boom-or-bust line for consecutive readings. The September ISM manufacturing PMI came in at 54.5, down only 0.1 percentage point from August, but in expansion territory for a ninth consecutive month. The September ISM services PMI came in at 54.9, in expansion territory for a 27th consecutive month. Both PMIs were significantly above the boom-or-bust line, indicating that the U.S. economy maintained an expansionary trend on both the manufacturing and services sides. On the prices front, both manufacturing and services rebounded noticeably. The September ISM manufacturing prices index rose sharply to 77.9 from 71.1 in August, up 6.8 percentage points, the highest level since June of this year and the 24th consecutive month of increases in raw material prices. The September ISM services prices index rose to 74.0 from 72.6, a new high since July 2022. As a leading indicator of CPI, the prices index reflects changes in input costs on the corporate purchasing side, and its continued climb indicates that inflationary pressure is reaccumulating and may further pass through to the consumer side in the future. On the employment front, manufacturing moved further up, while services improved marginally. The September ISM manufacturing employment index rose to 52.7 from 51.2 in August, in expansion territory for a third consecutive month. The services employment index rose to 50.1 from 47.8 in August, returning to expansion territory for the first time since June. Combined with the September nonfarm payroll data, the rebound in manufacturing employment is evident, supported by the expansion of data center construction driven by AI capital expenditure and the recovery in manufacturing production. However, service-sector employment is still clearly affected by AI, and the broad trend of shrinking employment in the technology and financial sectors has not yet reversed. Some companies in the ISM survey also reported that they are adjusting staffing structures because of efficiency gains from AI tools. II. Overseas Central Bank Developments 1. Federal Reserve: cooling data and more dovish officials temporarily cool rate hike expectations The nonfarm data and some officials' remarks cooled expectations for an October rate hike. September nonfarm payrolls were 29,000, versus an expected 90,000 and a previous 133,000, while the July-August data were revised down by about 30,000 each; the unemployment rate came in at 4.2%, versus an expected 4.1% and a previous 4.1%. After the data release, combined with the downward revision to the August PCE data, the market-implied probability of the October FOMC pausing rate hikes rose to 80%. In addition, on September 29, New York Fed President Williams said that given the policy action we took at the September meeting, there is no need to rush and we have time to gather more information; on October 1, Fed Vice Chair Jefferson said the Fed may need more time to decide on the next rate hike; the same day, Bowman said there is no need for further rate adjustments this year; and other officials also hinted that another rate hike in October was unnecessary. Therefore, the shift toward more dovish official remarks cooled market expectations for an October hike, though the market still priced one hike in December. The short-term liquidity reflux scenario we have mentioned many times is gradually materializing and has provided a temporary boost to risk appetite. But looking ahead, the landing of the September rate hike is not the exhaustion of bad news, but rather the start of the Fed's rate hike cycle. Due to factors such as the difficulty of fundamentally easing U.S.-Iran tensions, the potential risk of conflict spillover, and the continued decline in global crude oil reserves, we maintain our judgment that liquidity will still trend toward ebbing after a brief reflux. 2. ECB: rate hike expectations have cooled somewhat Recently, ECB officials' remarks have generally been hawkish, emphasizing that upside inflation risks remain high, but some officials also pointed to the drag on the economy from higher interest rates and weaker fiscal support, so expectations for an October rate hike have also cooled somewhat. Euro area August CPI rose 3.3% year over year, above 2.9% in July, the highest level since September 2023, and has been above the ECB's 2% target for multiple consecutive months. Core inflation excluding food and energy edged down to 2.4%, indicating that current inflationary pressure is still mainly concentrated in the energy supply shock rather than broad-based demand overheating. The ECB already raised rates by 25bp in September, and given the weak momentum in the economic recovery, it may raise rates by another 25bp before January next year. 3. Bank of Japan: still in a rate hike channel The Japanese economy remains resilient. Although the Middle East situation and high oil prices have created some drag on the economy, exports, industrial production, and corporate investment still provide support, private consumption remains resilient, and real wage growth has turned positive. Japan's output gap in the first quarter of this year was 0.5%, a clear improvement from 0.1% in the first quarter of 2024, and it has remained steadily above 0.5% for four consecutive quarters, with the economy currently in a moderate recovery channel. Kazuo Ueda clearly signaled continued rate hikes. On October 6, Kazuo Ueda said that we will continue to gradually raise the policy rate and adjust the degree of monetary easing in line with developments in economic activity, prices, and financial conditions. Currently, the Bank of Japan's model estimates the natural rate range at -0.9% to 0.5%; if estimated with a 2% inflation target, the nominal rate would be in the 1.1% to 2.5% range, corresponding to an expected midpoint of about 1.8%. Kazuo Ueda also said that 2.5% may be the upper limit of the current estimated neutral range, and we expect the Bank of Japan may have at least two more rate hikes. III. Key Overseas Political News 1. Middle East conflict escalates, while oil prices cool somewhat The Middle East situation has escalated again, with the conflict further spilling over into the Red Sea and Saudi energy facilities. The dispute between the U.S. and Iran over navigation through the Strait of Hormuz and Iranian crude oil exports remains unresolved, and military conflict in the Red Sea direction has further intensified. On October 5, Yemeni government forces backed by Saudi Arabia, supported by large-scale Saudi airstrikes, launched a new offensive against the Houthis, retaking some coastal areas near the Bab el-Mandeb Strait and advancing toward the strategic port of Mokha. In response, the Houthis claimed to have attacked key facilities including Riyadh's King Khalid International Airport, the Rabigh Saudi Aramco refinery, and Abha Airport, with the attacks and damage still pending verification. Previously, Saudi Arabia's east-west oil pipeline had already been affected by attacks, and disruptions to Red Sea shipping had also constrained crude oil exports from Yanbu port. Overall, the Middle East conflict is spreading from crude oil transport constraints at the Strait of Hormuz further toward Red Sea shipping and Saudi energy infrastructure, and risks to the regional energy supply chain remain high. However, during the National Day holiday, oil prices did not continue to surge one-sidedly and instead cooled somewhat, with the core reason likely being that the market began trading the expectation that "supply repairs will outpace conflict escalation." The U.S. Department of Energy announced on September 29 that it would again launch a crude oil exchange of up to 40 million barrels from the SPR, continuing the previously announced release arrangement of 172 million barrels; on October 2, the G7 further agreed, through IEA coordination, to release within the next four months the 100 million barrels of crude oil and diesel and other strategic reserves from the previously pledged amount that had not yet been delivered, prioritizing diesel, while committing to avoid imposing energy export restrictions. At the same time, on October 5, Trump signed an executive order temporarily allowing tax-exempt dyed diesel originally intended for non-highway uses such as agriculture and construction to be used for highway transportation, deferring the related federal diesel tax obligation until the end of the year, in order to reduce trucking and agricultural production costs. In price terms, as of October 5, the weekly average prices of Brent and WTI had fallen to $100.32 per barrel and $89.43 per barrel from $103.53 per barrel and $90.42 per barrel on September 30, respectively. Looking ahead, as the U.S. midterm elections approach, the Trump administration has a strong policy incentive to stabilize energy prices and ease the pressure of living costs on households, and it is expected to continue actively taking measures in the short term to curb excessive oil price increases. However, strategic reserves mainly ease phased supply pressure. If the policy-driven inventory buffer weakens after the midterms, combined with the continuation of the Middle East conflict and renewed obstruction of key shipping lanes, oil prices still face the risk of rising again. 2. Europe's political landscape is accelerating its reshaping The UK is reopening discussion of its long-term relationship with the EU, and UK-EU relations are expected to improve further. On September 30, UK Prime Minister Burnham said that the UK should reassess its post-Brexit relationship with Europe and include options such as maintaining the status quo, joining a customs union, returning to the European single market, and even rejoining the EU in long-term policy discussions. He believes that the negative impact of Brexit on the UK economy outweighs the benefits, and that existing cooperation arrangements need further adjustment. Compared with previous cooperation focused mainly on specific trade and regulatory rules, this is the first time the UK government has explicitly included rejoining the EU as a policy option, meaning that the improvement in UK-EU relations is beginning to extend from technical cooperation to deeper discussion of institutional relations. French President Macron welcomed the possibility of the UK rejoining the EU but stressed that the UK cannot selectively enjoy the rights and benefits of EU membership. Recently, the two sides have advanced cooperation in areas such as Shenzhen Agricultural Power Group trade rules, linkage of carbon emissions trading systems, and youth exchanges, and plan to hold a UK-EU summit in November. Looking ahead, UK-EU economic and institutional ties are expected to strengthen further, but rejoining the single market or the EU still involves multiple constraints such as regulatory autonomy and free movement of people, so actual progress in the short term will still mainly focus on cooperation in specific areas. At the same time, political and fiscal risks within the EU are rising, with France's fiscal predicament and Spain's early election intensifying market concerns. On October 1, the French government published its draft 2027 budget, planning to achieve about 54 billion euros in fiscal savings by freezing some public-sector wages and pensions and compressing local government and healthcare spending, reducing the fiscal deficit ratio from 5.4% in 2026 to 5.0% in 2027. However, France's public debt is already close to 119% of GDP, and with the 2027 presidential election approaching and significant political divisions in parliament, the budget still faces strong resistance to implementation. Market concerns about France's fiscal sustainability have further intensified, with the 10-year French-German government bond spread once widening to about 150bp, a new high since the 2011 European debt crisis. On October 5, Spanish Prime Minister Sanchez announced that the general election originally scheduled for 2027 would be moved up to November 29 this year, mainly against the backdrop of blocked housing reform, insufficient parliamentary support for the ruling coalition, and continued domestic housing protests. Amid the combination of multiple political risks, the euro fell to a low of 1.12 against the dollar on October 5. Looking ahead, France's fiscal consolidation and the outcome of Spain's election still face uncertainty, which may continue to push up European sovereign risk premiums and increase volatility in the euro and European bond markets. 3. The Takaichi government faces dual constraints in fiscal and monetary policy The contradiction between the Takaichi government's active fiscal policy and the Bank of Japan's monetary tightening has become more apparent, putting pressure on the Japanese government bond market. The summary of opinions from the Bank of Japan's September monetary policy meeting released on October 1 showed that some members believed underlying inflation was already near or above the 2% target and that further rate hikes were necessary, but government representatives stressed that the cumulative impact of previous rate hikes on the economy should be carefully assessed. On October 5, Sanae Takaichi reiterated in her policy speech to the Diet a "responsible proactive fiscal policy," planning to support economic growth through measures such as food consumption tax cuts and strategic investment, while committing to control government bond issuance and maintain fiscal sustainability. However, market concerns about fiscal expansion and the debt burden remain strong, with the yield on 30-year Japanese government bonds rising to a record high of 4.166%. On October 6, Bank of Japan Governor Kazuo Ueda further emphasized the importance of anchoring underlying inflation stably around 2%, and the Bank of Japan's attention to inflation risks continued to rise. The same day, reports said the Bank of Japan may confirm in its subsequent economic outlook that underlying inflation has reached the 2% target, further strengthening market expectations of continued rate hikes within the year. Looking ahead, the difficulty of coordinating the Takaichi government's fiscal expansion with the Bank of Japan's monetary policy normalization has increased somewhat, and combined with high energy prices and a weak yen, long-end Japanese government bond yields still face some upward pressure, and volatility in the yen and Japanese risk assets may increase. 4. Summary of other overseas information 1) On September 30, Russia launched a new large-scale air strike on Ukraine's energy infrastructure. Russian forces used missiles and drones to attack energy facilities in Kyiv and other regions of Ukraine, affecting power supply in some areas. As winter approaches, the offensive and defensive struggle between Russia and Ukraine over energy infrastructure continues to escalate, and Ukraine's power supply and energy security face further pressure. 2) On October 1, Trump was intensifying campaign efforts for the midterms, stumping for Republican candidates. Trump traveled to Texas and Oklahoma that day to participate in campaign events, formally beginning an intensive campaign schedule about one month before the midterms, and planned to subsequently visit key states such as Ohio and Nebraska. Issues such as the cost of living, energy prices, and immigration remain key concerns for voters. The midterm election results will determine control of Congress over the next two years and affect the room for the Trump administration to advance policies on energy, tariffs, and other matters. 3) On October 2, Russia further eased the pressure of war spending through unconventional fiscal means. According to Reuters, since 2026, wealthy Russian individuals have contributed about 471 billion rubles (about $5.6 billion) to the government through so-called "voluntary donations," equivalent to more than 1% of full-year federal fiscal expenditure; at the same time, the Russian government also plans to raise fiscal funds by selling confiscated assets, raising taxes, and increasing government borrowing. As the Russia-Ukraine conflict enters its fifth year, military and security-related spending still accounts for a high share of Russia's fiscal expenditure, and fiscal financing pressure continues to rise. 4) On October 3, Ukraine announced it would step up strikes on Russian refining facilities. Ukrainian President Zelensky said that in response to Russia's recent new round of air strikes on Ukrainian cities and key infrastructure, Ukraine would further strike Russian oil refineries and other energy facilities. The United States had previously asked Ukraine to strike Russian oil facilities cautiously to avoid further pushing up global energy prices. As mutual attacks on energy infrastructure between the two sides intensify, the spillover effects of the Russia-Ukraine conflict on Russia's refined product supply and the global energy market deserve continued attention. 5) On October 4, Brazil held the first round of its presidential election, with Flavio Bolsonaro leading incumbent President Lula in votes. According to the first-round vote count, former President Bolsonaro's son, right-wing Senator Flavio Bolsonaro, won about 47% of valid votes, while Lula won about 45%. Neither reached the majority needed for direct election, and a second round will be held on October 25. Flavio's first-round performance exceeded most previous polls, and his Liberal Party also expanded its seats in the congressional elections. 6) On October 5, the EU accused Russia of carrying out hybrid attacks against European countries. EU High Representative for Foreign Affairs and Security Policy Kallas said that Russia has recently threatened European security through cross-border drone incursions, sabotage, and other hybrid attack methods. Previously, on September 30, Moldova reported that three drones had entered its airspace. The EU believes that the relevant incidents have increased security risks in the European region, further raising concerns about the Russia-Ukraine conflict spilling over into neighboring countries. IV. Overseas Asset Price Movements The performance of overseas assets from September 30 to October 6, 2026 is shown in the table below: Overseas stock markets generally rose: U.S. stocks rose overall, with the S&P 500 up 1.60%, the Nasdaq Composite up 2.29%, and the Dow up 0.71%; Germany's DAX rose 0.22%, France's CAC fell 1.64%, the UK's FTSE 100 fell 1.02%, and Japan's Nikkei 225 rose 5.89%. International bonds: The 10-year U.S. Treasury yield rose 2.1bp to 5.31%, while the 10-year German and Japanese government bond yields changed by -12.0bp and 2.8bp, respectively. Foreign exchange market: The U.S. dollar index rose 0.67%, the euro, pound, and renminbi depreciated, and the yen appreciated. Commodity markets generally fell: Most metal prices declined, with COMEX gold, silver, platinum, and palladium changing by -0.65%, 1.28%, 0.27%, and -2.85%, respectively. LME copper, aluminum, zinc, and nickel fell 0.39%, 3.03%, 4.55%, and 2.46%, respectively. In industrial products, WTI crude oil fell 1.09%, and NYMEX natural gas rose 1.32%. In Shenzhen Agricultural Power Group, corn and wheat rose 2.66% and 0.94%, respectively, while pork fell 0.99%.