Weekly focus – Yields higher on strong US data

We are heading into a crucial week for markets and the Fed with key US labour market data coming up. It will culminate with the payrolls report on Friday but before that we get the JOLTS job openings data, ADP private employment and Challenger job cuts. With the Fed having a sharp focus on downside risks to employment following disappointing job growth in recent months, the data will be key for whether the Fed will decide to cut again already again next month or wait for the December meeting. We look for a relatively solid report, with nonfarm payrolls growth at +80k, average hourly earnings growth at +0.3% m/m and unemployment rate steady at 4.3%. Our baseline scenario is that the next Fed cut is in December, but it is a close call between October and December.

The past week showed some decent upside surprises on US data including the labour market, where the weekly initial jobless claims dropped back to 218k, which leaves it back at low levels after a spike higher in early September related to some regional distortions. Continuing claims, which is another gauge of unemployment, also declined adding to the move lower starting in mid-August. Of other positive surprises an upward revision to GDP for Q2 from 3.3% to 3.8% stood out as the revision was driven by a lift to private consumption growth from 1.7% to 2.5%. Core durable goods orders for August also surprised positively pointing to robust investment growth. Normally there is a good correlation between investments and employment as both represent changes to production capacity. On the softer side US Flash PMI for September disappointed slightly, although still pointing to decent growth. A decline in the PMI output price index dampened some of the concern over rising inflation due to tariffs.

PMI data in the euro zone was a bit mixed with manufacturing turning lower but services going higher. The German ifo expectations index disappointed slightly. So, it was a bit of a mixed bag but still in line with our scenario of softer growth in the second half followed by higher momentum again in 2026 as fiscal easing starts to kick in more.

Markets responded to the stronger US data by sending yields and the USD higher while equities were on the backfoot. After a strong run taking stocks into stretched territory on momentum, the correction lower is not big enough to question the bullish market, though.

Apart from the US labour market data mentioned above, a focus point next week will be a possible US government shutdown on Wednesday if Congress fails to pass the government funding bill by Tuesday. Euro Flash CPI for September (Wednesday) will put more light on whether inflation is still in line with ECB's 2% target. We expect headline inflation to increase to 2.3% y/y in September from 2.0% y/y but it is mostly due to base effects from last year and as we expect momentum in core inflation to be broadly unchanged and well behaved, it should not be interpreted too hawkishly. Other key things to look out for over the coming week will be LDP leadership election in Japan (Saturday), Tankan survey in Japan (Wednesday) and US ISM manufacturing index (Wednesday).

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