Stocks rally as Fed rate hike expectations fade after weak US jobs data

Global stocks kicked off the week on a positive note, while the US dollar softened, as investors scaled back expectations for aggressive interest rate hikes by the Federal Reserve. The shift in sentiment followed weaker-than-anticipated US jobs data, which significantly reduced the likelihood of a rate increase this month. Trading volumes in Asia were light due to holidays in major economies, leaving markets to follow Wall Street's lead from Friday. The US jobs report showed slower job growth in September and downward revisions for the previous two months, making another rate hike this month seem unlikely.

Jose Torres, senior economist at Interactive Brokers, noted that while labor conditions remain stable, the recent revisions indicate job losses in two out of the nine months so far this year. This reduces the chance of the Fed raising rates by another 100 basis points. Investors are now pricing in just a 22% chance of a rate hike this month, down from 64% a week ago, according to the CME FedWatch tool. The prospect of a Fed pause boosted stock markets, with Japan's Nikkei 225 rising 2%, Australian stocks adding 0.5%, and Hong Kong's Hang Seng advancing 0.3%.

In the bond market, a recent selloff paused as benchmark US 10-year Treasury yields retreated slightly to 5.2643%, while two-year yields stood at 4.8143%. Despite the slight dip, yields closed higher on Friday as the jobs report did not rule out further rate hikes in the coming months. Cedric Lam, senior investment strategist at Standard Chartered, suggested that market technicals are temporarily delaying a move lower in bond yields due to forced selling among hedge funds and real estate investment trusts. He added that an opportunistic bullish outlook on US 10-year government bonds is warranted.

The US dollar weakened against major currencies amid reduced Fed hike expectations. The euro bounced from a 17-month low to $1.1243, while the pound ticked higher to $1.3241. Against the yen, the dollar was marginally down at 157.81. Elias Haddad, global head of markets strategy at BBH, noted that tighter policy elsewhere and a growing case for an October Fed pause are headwinds for the dollar. However, he cautioned that US growth outperformance and strong foreign appetite for US securities keep dollar risks skewed to the upside. In commodities, oil prices remained elevated after Yemen’s Iran-backed Houthis launched attacks on Saudi Aramco sites, with Brent crude little changed at $102.20 per barrel and West Texas Intermediate at $90.75. Gold rose 0.3% to $4,154.32 an ounce.