Data Flow Slows: Auctions, Yields Take Spotlight

Keith Lansford (0:05)

Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.

I'm Keith Lansford, and here is Schwab's early look at the markets for Monday, October 5th. This week could be a breather between last week's data blitz and the start of earnings season, as big banks report a week from Tuesday. There's enough on schedule to keep participants interested, though, including a sprinkle of earnings and several treasury auctions. Treasury yields and oil could set the stage, as they have for a while. Yields sagged early Friday after weak jobs data, but plowed back as investors still expect at least one more Federal Reserve rate hike in 2026, though not necessarily this month. Aggressive AI spending, global pressure on yields and rising government deficits appeared to outweigh one month's soft US jobs growth in the minds of bond traders who sent yields higher again Friday, despite the September Non-Farm Payrolls Report missing consensus. A couple items on tap today include final S&P Global US. Services PMI for September and the ISM Services Index for September soon after the open. The services economy has generally been solid, but the ISM's prices paid component bears watching after it rose 21 consecutive months through August to its highest level in four years.

US jobs growth slowed dramatically to 29,000 in September, and the government reduced its estimate for the prior two reports by a combined 60,000 according to Friday's Non-Farm Payrolls Report. The September headline was far below consensus of 84,000, and unemployment ticked up to 4.2 percent above consensus for an unchanged 4.1 percent. It wasn't all bad, as the Household Survey showed a gain of 406,000 in September, and the participation rate rose. Friday's data recast the jobs narrative, which had been on the men thanks to August's initial booming total of 162,000. That got downwardly revised to 133,000, while July's growth of 21,000 became a loss of 10,000. In addition, September wage growth fell to 0.1 percent, where analysts had expected 0.3 percent. Checking categories, health care employment was the only area with a significant job increase last month, manufacturing jobs rose slightly, and financial activities employment dropped by 7,000 in a continued lag. August's report was boosted by seasonal gains in educational and leisure jobs. The three-month growth average is now around 50,000, down from 71,000 previously. Slower jobs and wage growth raised concerns about consumer spending, as wages haven't kept pace with prices over the last year. Chances of an October rate hike, which climbed as high as 70% early last week, fell to nearly 14% early Friday, before rebounding later to 23%, according to the CME FedWatch tool. Market participants now see 85% odds of a hike at some point before year-end, now looking like the December meeting. Another hike seems likely early next year, but these odds can be fluid. The markets expect the Fed to remain patient here, said Colin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research. This doesn't change our expectations of two more rate hikes, but it gives the Fed more time to evaluate incoming data. More importantly, this report likely takes away the potential need to aggressively raise rates in the coming months. With wage growth of just 0.1% in September, fears of a tighter labor market sending wages higher and causing prices to rise seem reigned in for now.

Fears do seem elevated in corporate credit, where high yield spreads arose eight days in a row through last Thursday, suggesting high borrowing costs might be hurting companies' ability to secure loans. If persistent, this can drag corporate profit growth. Crude is another wild card. Prices fell Friday despite signs of rising tensions between the US and Iran, coming under pressure from reports of more supplies exiting the Gulf and a proposal for EU countries to release diesel from emergency inventories, Reuters reported. Recent talks between the warring parties haven't yielded fruit, media reports said.

Treasury auctions this week, including a 10-year note auction Wednesday, could provide insight into US debt demand. Solid auction results might ease yields, but there's no guarantee. A few well-received auctions several weeks ago did nothing to halt the yield rally. A 10-year note yield climbed 10 basis points last week by 25.28% near 24-year highs. The more rate-sensitive 2-year yield rose just 4 basis points last week. Investors await monthly revenue numbers this week from Taiwan Semiconductor Manufacturing, typically issued early each month from the world's largest chip manufacturer. Late this week, stay tuned for earnings from PepsiCo and Delta Airlines, as both can be good barometers of consumer demand. Also, be on the lookout for any pre-earnings updates from major companies, which sometimes occur soon before earnings season. On Friday, Tesla rose almost 5% after reporting third-quarter vehicle deliveries of more than 486,000. Analysts had expected roughly 460,000. Second-quarter deliveries were 480,000.