Markets Rally as Fed Hike Bets Dim

Global markets kicked off the week on a positive note, with stocks gaining momentum and the dollar weakening as investors scaled back expectations for aggressive rate hikes by the Federal Reserve. The shift in sentiment followed cooler-than-expected US jobs data, which significantly reduced the likelihood of another rate increase this month. The nonfarm payrolls report for September showed slower job growth than anticipated, along with downward revisions for the previous two months, dampening expectations for further tightening.

Jose Torres, senior economist at Interactive Brokers, noted that while labor conditions remain stable, the revised data suggests the US economy has lost jobs in two of the past nine months. This reduces the probability of the Fed raising rates by another 100 basis points, as previously priced in by markets. The CME FedWatch tool now indicates only a 22% chance of a rate hike this month, down from 64% a week ago.

Asian markets responded positively to the reduced hike expectations, with Japan’s Nikkei rising 2% and Australian stocks gaining 0.5%. MSCI’s Asia-Pacific index outside Japan also edged up 0.15%. Meanwhile, futures for the Nasdaq and S&P 500 advanced 0.3% and 0.1%, respectively, while European indices like the EUROSTOXX 50 and FTSE also saw gains. In Brazil, markets were set to rally later in the day following the presidential election results.

Bond markets saw a brief respite from recent selloffs, with US Treasury yields retreating slightly. The 10-year yield stood at 5.2643%, while the two-year yield was at 4.8143%. Despite the pullback, yields remain near multi-year highs due to government financing pressures and elevated energy costs. Cedric Lam, senior investment strategist at Standard Chartered, suggested that while technical factors may delay a drop in yields, an opportunistic bullish outlook on US 10-year bonds is warranted.

The dollar weakened against major currencies, with the euro rebounding from a 17-month low to $1.1243 and sterling ticking higher to $1.3241. Against the yen, the dollar was marginally lower at 157.81. Elias Haddad, global head of markets strategy at BBH, noted that tighter policies elsewhere and a growing case for a Fed pause are headwinds for the dollar, though strong US growth and foreign demand for US securities could support it.

In commodities, oil prices remained elevated following attacks on Saudi Aramco sites by Yemen’s Houthis. Brent crude futures were little changed at $102.20 per barrel, while US crude stood at $90.75 per barrel.