Traders Gave Up on an October Fed Hike, Not on a December One

On Friday morning the Labor Department released the September jobs report.

Nonfarm payrolls rose by 29,000. Forecasts sat between 80,000 and 90,000.

A week earlier, the market was nearly certain the Fed would hike again in October. By Friday evening those odds were below one in five.

Yet the 2-year Treasury yield did not fall that day. It rose from 4.78% to 4.83%.

One Week, Two Data Releases

The Fed delivered its first hike in three years on September 16, lifting the target range to 3.75%-4.00%. Strong growth data followed and, as we wrote on September 23, an October hike became the base case.

According to Yahoo Finance on September 28, the CME FedWatch tool put the odds of an October 28 hike at 72.5%.

Then two releases landed back to back.

The August PCE report on September 30 showed core prices up 3.0% from a year earlier. CNBC cited a 3.3% consensus. By Friday's open, CME odds for October had already slid to about 36%.

Friday's jobs report took most of what was left.

Sources put the final figure between 16% and 18%; the gap reflects when each reading was taken.

What Is Inside the Number

The revisions matter more than the headline. July was cut from +21,000 to -10,000 and August from 162,000 to 133,000. The two months lost 60,000 jobs combined.

The unemployment rate was 4.2%. The department says it has ranged between 4.1% and 4.3% since March.

Average hourly earnings rose 0.1% on the month and 3.0% on the year. Headline PCE inflation over the same span was 3.4%.

That leaves average pay 0.4 points behind prices. The labor market is not feeding inflation through wages.

Vanguard senior economist Adam Schickling told CNBC: "This report strengthens the case for the Federal Reserve to remain patient."

Traders Did Not Cancel the Hike

They postponed it.

CNBC reported that CME still assigns better than 75% odds to a hike at the December meeting. On the Kalshi prediction market the figure is 65%.

That distinction explains why the 2-year yield held up. The arithmetic is simple.

The weekly move fits that frame. The 2-year yield is down 9 bp since September 28. That is more than a delay is worth, and far less than a cancellation.

Sources do not tie Friday's 5 bp rise to a single cause. Much of the weak data may have been priced during Thursday's 10 bp drop; no report confirms that.

The Long End Is Asking a Different Question

Treasury's daily data show how yields moved over the week:

The short end prices the Fed's calendar. The long end prices the long-run cost of inflation and debt supply.

The delay eased the short end. It did not ease the long end. The curve steepened by 13 bp in a week. More: What Is the Yield Curve?

Stocks followed the short end. The Nasdaq Composite rose 1.19% on Friday to a record close of 27,190.86, and the S&P 500 gained 0.73%.

The past month of QQQ, which tracks the Nasdaq 100, frames how tech stocks have traded under rate pressure since the Fed's hike.

Two Dates

The Fed decides on October 28. The October jobs report arrives on November 6, after the decision.

That makes September's 29,000 the last payroll figure the Fed will see before October. Two more jobs reports will land before December's meeting.

An unemployment rate above the 4.3% band is the first threshold that would put December in question too.

This story draws on the Labor Department's September employment report of October 2, the Commerce Department's personal income and outlays release of September 30, Treasury's daily yield curve data and the Fed's 2026 meeting calendar. CME FedWatch and Kalshi odds and consensus forecasts are as reported by CNBC and Yahoo Finance; readings differ slightly depending on when they were taken. The 2-year calculation is a simplified approximation that ignores term premium.