The US Labor Market
September Hiring Trudged Along but Labor Market Still on Steady Track
US economy adds just 29,000 jobs in September as hiring slows sharply
The WSJ headline (top) sounds much better than the FT’s.
The WSJ:
The 29,000 number will seem low to anyone who remembers the job gains that routinely topped 200,000 in the years before the pandemic—much less the massive job gains that came when the economy reopened from Covid-19.
Jobs numbers for both July and August were revised down. Employers shed 10,000 jobs in July, down from a previous estimate of a gain of 21,000. August’s job gain was revised to 133,000, from 162,000. Combined, revisions trimmed 60,000 jobs from the previously estimated tally for July and August.
But the economy doesn’t need to generate as many jobs as it used to just to keep the labor market steady. The population is aging, and an immigration clampdown has reduced growth in the supply of workers.
In a positive sign, what is called the labor-force participation rate—the share of people working or looking for work—inched up slightly. “That all speaks to continued strength in the labor market,” said Kathy Bostjancic, chief economist at Nationwide. (…)
The most important development was that the report provided no signs that the labor market is tightening in ways that would add to price pressures. (…)
“There are clear signs of a positive spillover” from data-center spending into the job market, said Ruchir Sharma, U.S. economist at Nomura.
The FT:
The US economy added just 29,000 jobs in September as hiring slowed sharply from the previous month, raising doubts over the resilience of the labour market and the outlook for interest rate rises.
Friday’s figure from the Bureau of Labor Statistics marked an abrupt reversal from the downwardly revised 133,000 jobs added in August and was well short of the 88,000 job gains anticipated in a Bloomberg poll of economists.
Hiring decelerated across multiple sectors, with healthcare, a big driver of job gains in previous months, slowing sharply. Employment in the financial sector continued to contract.
Payrolls for July and August were revised lower by a combined 60,000 positions. The July figure fell to a loss of 10,000 jobs. The unemployment rate climbed to 4.2 per cent in September from 4.1 per cent in August.
Amid high monthly volatility, quarterly data provide clearer trends: growth in labor income keeps slowing, from 4.0-5.0% annualized in 2025 to 3.5-4.0% in 2026, with increased hours offsetting slower job growth and wage gains now rising at a 2.5% annualized rate, well below inflation, core or not.
Labor income YoY growth (black below) has been stable around 4.0% in 2026 but accelerating inflation is eroding purchasing power, offset by a big drop in the savings rate, lately sustaining nominal spending growth to 6.0%.
Boomers spending their savings plus the strong wealth effect add to the AI boom, keeping the US economy humming amid all the turmoil.
Vulnerabilities are developing however:
- it’s easier and faster for employers to cut hours than jobs if demand slows;
- the wealth effect is also carving its own K shape: investors with tech stocks are doing OK but those without are now suffering;
- at 2.5% annualized, wage growth is well below inflation, requiring that the 2 warnings above don’t materialize.
Saudi East-West Oil Pipeline Is Said to Be Flowing as Normal After accounting for supplies to refineries on Saudi Arabia’s west coast, Aramco had about 4.5 million barrels a day of flows available for exports as of last week
Yemen’s Iran-aligned Houthi movement has claimed responsibility for a missile and drone attack on Saudi Arabia’s energy infrastructure, saying it targeted an Aramco facility in Riyadh in retaliation for Saudi-backed military operations in Yemen.
Houthi military spokesman Yahya Saree said the group launched long-range ballistic missiles and drones at the Saudi facility and described the operation as precise. He claimed the attack caused fires at the targeted site and warned that the Houthis would respond to any further escalation by Saudi forces. (…)
The Houthis said their latest attack was a direct response to Saudi military operations in Yemen, including airstrikes against Houthi-controlled areas. Saudi-backed forces supporting Yemen’s internationally recognised government have intensified military operations across several fronts, including areas around Taiz and Lahij.
Yemeni government forces reported 97 military operations targeting Houthi reinforcements around the Tor al-Baha front and Taiz axis. They claimed that the operations targeted about 260 Houthi fighters and destroyed or disabled 44 military vehicles. The figures could not be independently verified.
Meanwhile, Saudi-backed forces have continued airstrikes against Houthi strongholds in Sanaa, Saada and surrounding provinces. Health officials in Sanaa have reported dozens of casualties from recent attacks, while Houthi projectiles have contributed to heightened military tensions along Saudi Arabia’s southern border.
The latest escalation follows the collapse of a fragile truce established in 2022. Fighting has since intensified across multiple fronts, including Taiz, Lahij and Marib, with regional reports suggesting that Saudi Arabia and Yemeni government forces could be preparing a larger offensive to reverse recent Houthi gains. (…)
The Strait of Hormuz will not reopen until seven Iranian conditions set out in a June interim agreement with the US are met, state media reported Iran’s parliament speaker Mohammad Baqer Qalibaf as saying on Sunday. (…)
“The position of the Islamic Republic of Iran is completely clear and firm, and the Strait of Hormuz will not be opened until our seven conditions, based on the Islamabad Memorandum of Understanding, are met,” Qalibaf, who is Iran’s top negotiator, was quoted as saying.
He said Washington “must understand that the period of dragging out the (diplomatic) process and dictating one-sided demands is over”.
“The Americans’ propositions are more or less in line with their previous positions, specifically on the nuclear issue. We told them our focus in this stage is the issue of the Strait of Hormuz and the return to security in this waterway requires clear steps from the US,” spokesperson Esmaeil Baghaei said.
He also denied Tehran had offered UN nuclear watchdog inspections of its nuclear facilities in exchange for US sanctions relief, saying Iran had not entered into nuclear discussions with Washington.
The document being circulated outlines a seven-day period of trust-building aimed at returning the two sides to an enhanced version of the memorandum of understanding agreed in June, including concrete steps on Iran’s nuclear programme, an official briefed on the talks said last week.
The disagreement centres on the sequencing of the steps rather than the components of the plan, the official added. (…)
Bond Vigilantes Gone Wild (Ed Yardeni)
The Bond Vigilantes have gone wild worldwide, pushing government bond yields higher in developed and emerging markets alike.
A month ago, we asked whether rising yields reflected stronger growth, higher inflation, or looming fiscal crises. We still think the answer is mostly growth. The exception is where government finances are weakest. There, bond investors are charging a fiscal-risk premium. France may be on the verge of a full-blown debt crisis. (…)
Six of the 22 bond markets on our list have seen 10-year yields climb 100bps or more this year. France leads at 131bps, with the US second at 112bps. Italy, Indonesia, Japan, and South Korea round out the group. (…)
The Japanese budget deficit, central bank policy and currency are all playing an immediate role in the intensifying global bond selloff, leading to knockdown effects on American consumers who end up saddled with higher borrowing costs. (…)
In recent months, Takaichi’s government has made record spending requests, with a mind to boosting Japan’s slow (and slowing) economic growth. The concern is where all of that is going to come from. (…)
That means a few more shovels full will be added to Japan’s $9 trillion public debt pile, which at roughly twice the size of its economy makes it the most indebted advanced nation on earth.
To make matters more complicated, in an August interview with the Yomiuri newspaper, Takaichi said the government intends to cap the issuance of new government bonds at 40 trillion yen next year, or about $255 billion.
Unsurprisingly, the mix of increased spending, cuts to revenues and limiting debt financing has raised more eyebrows on the bond market than a silverback gorilla bathing in a hot spring reserved for Japanese macaques.
For Japan, this cloudy outlook has accelerated the rapid bond market sell-off that’s impacting economies around the world.
The bond market has effectively told governments in recent weeks: “If you want us to loan you money for a decade or 30 years while you’re spending more and more, you’re gonna need to pay us a higher premium for taking on the risk.” (…)
Adding to those pressures are circumstances out of Japan’s control. Central banks, including the Bank of Japan, have been pressed to hike interest rates because the U.S.-Iran war has raised the cost of energy and especially of diesel. (…)
Governor Kazuo Ueda told a press conference in Tokyo that the bank’s focus flipped from trying to raise the country’s persistently low inflation to its 2% target to trying to stabilize inflation against the upward pressures caused by the war, the massive global spending on AI and a weakened yen.
According to a summary of the BoJ’s meeting, most policymakers believe they should follow last month’s rate hike with more.
The American Angle
All of this activity in Japan, the world’s fourth largest economy and one of its most heavily financialized, impacts the U.S. bond market and, ultimately, American consumers.
The most straightforward impact is simple, upward pressure. The decades-high government yields in Japan, the U.K. and Europe are all driving each other higher, as investors try to lock in better returns, and U.S. bonds are no exception. (…)
The 10-year U.S. Treasury yield, a key benchmark for borrowing costs, rose to 5.34% on Thursday, the most since 2002. In the third quarter, it rose nearly 90 basis points, or the most in any quarter in over 25 years. (Japan’s 10-year government bond yield has risen by double digit basis points for five straight quarters).
The U.S. bond yield, of course, is also being driven up by inflationary pressure and increasing investor concerns about its own government spending and debt, which is nevertheless considerably smaller than Japan’s when measured as a percentage of GDP. The enormous volume of private sector spending on artificial intelligence is also exerting upward pressure on yields.
“As more and more of the AI CapEx is financed in debt markets, we are seeing there’s some competition now for government borrowing,” said George Cole, the head of European rates strategy at Goldman Sachs Research, on a podcast last month.
But there’s another reason for Japan’s outsized impact on the U.S. Treasury market: Japan is the largest foreign holder of U.S. debt. As of July, the country had roughly $1.1 trillion U.S. Treasuries, equal to 12% of all foreign held U.S. debt, as of July, according to Treasury Department data.
This was in large part a function of the country’s relatively low interest rates, which for decades depressed bond yields and incentivized investors to seek out better returns abroad.
The normalization of interest rates and rise of bond yields at home means Japanese investors have less reason to place their money abroad.
A TD Bank analysis earlier this year found these shifts mean Japan’s insurers and pension funds, which have been “a key source of stable, long-duration demand for U.S. Treasuries,” will likely keep their money at home, reducing Treasury demand and thus driving up borrowing costs for the U.S. government.
Another factor that weighs on Japanese investors is the yen, which has flirted with four-decade lows this year.
A weak yen makes life more expensive at home for the Japanese, forcing Tokyo to consider selling off its dollar assets including Treasurys, which would threaten the U.S. with even higher borrowing costs. It also makes it harder for U.S. companies to compete in Japan’s important retail market because imports are suddenly much more expensive.
This is why U.S. Treasury Secretary Scott Bessent has aggressively moved to boost the Japanese currency. “I am the house now, and you can bet against me if you want,” he declared last month, after U.S. and Japanese officials confirmed a joint intervention to support the yen worth of tens of billions of dollars.
Along with the BoJ’s latest rate hike, the intervention helped the yen add 3.3% against the dollar in the third quarter, making it the top performing currency in the G10 for the period, according to Deutsche Bank.
Other policy factors were likely under consideration.
“A weak yen tends to put pressure on other Asian currencies, and it could make it harder for China to continue to allow a slow appreciation of its currency,” wrote Brad W. Setser, a senior fellow at the Council on Foreign Relations, in August. (…)
On the other hand, Bessent and the BoJ have to be careful about balancing the currency’s strength with rate hikes in Japan. The suddenly surging yen has caused headaches for investors who use the so-called carry trade, a term for borrowing cheap Japanese currency to invest it in assets with higher yields. If the yen keeps rising and the BoJ proceeds with planned rate hikes, borrowing in yen will suddenly become more expensive.
Many market observers fear that could force investors to sell U.S. stocks and Treasuries to close out the trade. Some say it’s already happening.
“A more likely explanation for the global bond market rout [than inflation] is that the yen-carry trade is unwinding as the Bank of Japan raises its policy rate, forcing carry traders to sell government bonds they bought worldwide with proceeds from cheap yen loans,” wrote Yardeni Research President Ed Yardeni last week. “This trade allowed many governments to run budget deficits without putting upward pressure on their bond yields. Now, the chickens have come home to roost.”
In the immediate term, the rising bond yields in Japan, the U.S. and elsewhere are dictating the terms for borrowing costs across economies, which includes mortgages, auto loans and student debt. Borrowing becomes expensive for consumers and companies, not just governments.
Japan may be a long way away, but surging 30-year U.S. home loan rates have blown up the playbook for would-be borrowers, topping 7% while home prices remain at record highs. The rising sun is just over the horizon line.
Callum Thomas illustrates the impact higher rates are having:
- Equal-Weighted Weighed-Down: however, the equal-weighted S&P500 closed September down -5% m/m, and has seen an almost -7% drawdown off the mid-Aug peak. Breadth has also plunged to the worst levels since the 2025 tariff-tantrum. And there is a very clear reason for this…
Source: MarketCharts.com
- It’s a Rates Thing: rate-sensitive sectors have been clobbered —declining an average -10% thanks to the Fed pivot to rate hikes + global sovereign bond bust.
Source: Can Anthropic Outearn Its Obligations?
- Rates Wreckage: here’s another angle on it, small caps have also come under significant pressure from rising bond yields particularly as a lot of small cap companies have poorer profitability, lower rated credits, and more floating rate debt. But the other usual suspects have also come under pressure as the hangover from the Iran war ripples across macro and markets.
Source: The 5% Treasury Yield: It’s Here and How It’ll Affect Stocks
Source: @SamRo via @TheShortBear
Bad, bad breath:
The McClellan Summation Index (red line, broadly whether the typical stock is doing relatively better or worse than the index).
Fear is winning over greed:
Opportunities?
- Real 10Y rates are near their 25-year peak:
- But, but, look at the pre-2000 years. Real yields were much higher:
- The term premium (extra yield investors demand to hold a longer-term bond instead of continually rolling over short-term bonds for the same period)
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The term premium vs core inflation:
It seems like a “In Warsh We Trust” decision.
US Lead in AI Over China Narrows After DeepSeek Gains, BI Says
American AI companies’ performance lead over China narrowed sharply in past months to a record low after labs such as DeepSeek gained ground, threatening US tech supremacy, according to Bloomberg Intelligence.
Top Chinese models lag their US rivals by just 3% on benchmark scores after the September release of DeepSeek’s V4.1 Flash, BI senior analyst Robert Lea wrote in a report Monday. That’s down from about 9% in May and 15% earlier in the year. That improving performance spells further market share gains for Chinese contenders, he said.
China’s ascent is a result of deepening AI expertise and its researchers’ ability to optimize their models for domestic hardware. The gains raise questions about the usefulness of US export restrictions on technology such as Nvidia Corp. chips, intended to curtail Chinese AI advances and prevent the likes of Huawei Technologies Co. from making progress with their own alternatives.
The Asian country’s progress “casts further doubt on the long-term sustainability of US technological supremacy in AI,” Lea said. (…)
DeepSeek’s V4.1 Flash ranked sixth globally last month on LiveBench, making it the highest-ranked Chinese model since the startup broke ground with its reasoning model R1 in 2025. LiveBench scores AI models based on their responses to and analysis of questions, puzzles or tasks, a process akin to gauging human IQ.
DeepSeek last recorded a LiveBench score of 81.1, below Anthropic’s best score of 83.4. That means the DeepSeek model delivers “comparable performance” to leading AI systems from Anthropic and OpenAI, Lea said. Still, while the score gap has narrowed to just 3%, just three of the top 15 models as assessed by LiveBench were Chinese. (…)
The Chinese AI industry could remain unprofitable until 2030, Lea said. A focus on low-margin token supply and a brutal price war may make it impossible for any firm to gain a competitive edge in a domestic market flooded with more than 1,100 large language models.
ByteDance Ltd.’s Doubao is the frontrunner in AI app monetization, while the chatbots of rivals DeepSeek and Tencent Holdings Ltd. remain free, Lea said.
“Putting China’s AI sector on a sustainable profit footing will require a cooling of competitive pressures, an industry shakeout, and a more rational approach to pricing,” he said.