Trading Week: The Fed Gets Breathing Room – the Bond Market Doesn’t

The trading week from September 28 to October 2 began with a sell-off in government bonds and ended with hopes that the Federal Reserve may refrain from raising interest rates again in October.

In between came fresh multi-year highs in bond yields, a surprisingly weak US jobs report, a marked increase in eurozone inflation and oil prices still above $100 a barrel. At the same time, the AI industry once again delivered figures showing just how enormous the investment boom has become.

Markets have not been given an all-clear. They have merely bought themselves some time.

Friday Saves the Week – But Not for Everyone

On Friday, equity markets initially reacted with relief to the US jobs report. Nonfarm payrolls rose by just 29,000 in September, well below expectations of 90,000. Figures for July and August were also revised down by a combined 60,000 jobs.

The unemployment rate rose from 4.1 to 4.2 percent. Wage growth cooled as well: Average hourly earnings increased by just 0.1 percent month on month, while annual growth slowed from 3.1 to 3.0 percent.

For the Federal Reserve, this is an important signal. The labor market is currently generating little additional inflationary pressure. At the same time, it is not yet weak enough to suggest that a recession is imminent. Economists describe it as a “low-hire, low-fire” labor market: Companies are hiring cautiously, but they are not yet cutting jobs on a broad scale.

On Wall Street, that combination was enough to trigger a strong Friday rally. The S&P 500 gained 0.73 percent, the Nasdaq 1.19 percent and the Dow Jones 0.49 percent.

The weekly balance nevertheless remained mixed. The S&P 500 lost 0.27 percent and the Dow 1.26 percent. Only the Nasdaq managed to finish the week in positive territory, gaining 0.45 percent.

In Germany, the DAX rose 1.17 percent on Friday to 25,231.20 points but still ended the week down 0.7 percent. The STOXX 600 also recovered by 0.8 percent on Friday but finished the week lower.

Friday therefore limited the losses. It did not eliminate the risks that had defined the week.

The Fed Buys Itself Time

US inflation data had already provided some relief on Wednesday.

The PCE price index, the Federal Reserve’s preferred inflation gauge, rose 0.3 percent in August from the previous month and 3.4 percent from a year earlier. Core inflation, excluding energy and food, increased by 0.2 percent month on month and 3.0 percent year on year.

That remains well above the Fed’s 2 percent inflation target. Yet the increase was smaller than feared. Retrospective methodological adjustments also lowered inflation readings for previous months.

Together with the weak jobs report, that significantly changed interest-rate expectations.

After the Fed raised its benchmark rate by 25 basis points in September to a range of 3.75 to 4.00 percent – its first increase since 2023 – another hike in October had at one point appeared likely. A week earlier, markets had put the probability at more than 64 percent.

By Friday, it had fallen to around 23 percent.

A rate hike at the October 27–28 meeting is therefore not completely off the table, but it is no longer the base case.

That does not mean the Fed’s battle against inflation is over. Core inflation remains at 3 percent. Energy prices are high, and US consumer spending remained remarkably robust in August, rising 0.9 percent from the previous month.

According to revised figures, the US economy expanded at an annualized rate of 2.2 percent in the second quarter. In addition to consumer spending, business investment in equipment and AI infrastructure was a major contributor to growth.

This creates a new dilemma for the Fed. The labor market is cooling while consumption and investment continue to grow and inflation remains above target.

Under these conditions, an October pause would not amount to a monetary policy reversal. It would simply give the central bank more time to assess incoming data.

The Bond Market Is Not Buying the Relief Yet

That was nowhere more evident this week than in government bonds.

The yield on the 10-year US Treasury climbed as high as 5.34 percent on Thursday, its highest level in 24 years. On Friday, despite the weaker jobs data, it was back around 5.28 percent.

Over the week, the 10-year yield rose by roughly ten basis points, marking its fifth consecutive weekly increase. US government bonds ended September with their steepest quarterly rise in yields since 1994.

That is remarkable because weaker employment data and lower expectations of a Fed rate hike would normally push yields down.

But the bond market is trading on much more than the Fed’s next move.

It is pricing in higher energy costs.

It is pricing in governments’ enormous financing requirements.

And it is pricing in an AI investment boom that is forcing companies to raise ever-larger amounts of capital as well.

Investors are therefore demanding higher yields even if the Fed pauses in October. The short end of the yield curve reacts primarily to the central bank. The long end is increasingly responding to inflation, public debt and competition for capital.

The message is clear: A rate pause may stabilize short-term financing costs. It will not make capital cheap again.

AI Is Supporting Growth – and Making It More Expensive

Artificial intelligence remained the most important support for equity markets this week.

Micron Technology forecast revenue of around $61.5 billion for the current quarter, significantly exceeding analysts’ expectations. Contractually committed customer purchase obligations rose from $22 billion to $32 billion, while the backlog of already agreed future business reached around $150 billion.

High-performance memory for AI data centers is particularly scarce. According to Micron, a large share of its 2027 production capacity has already been contracted, and the company plans to increase investment in additional capacity.

The figures help explain why the Nasdaq is coping with rising interest rates better than many other market segments. The AI buildout is creating real demand for chips, memory, data centers, energy and grid infrastructure.

That demand is now also visible in economic data. The eurozone manufacturing purchasing managers’ index rose to 52.9 in September, its highest level since May 2022. Germany reported solid growth, with particularly strong demand for capital goods linked to AI and defense applications.

In South Korea and Taiwan, semiconductor and AI orders also drove industrial production. Taiwan’s purchasing managers’ index climbed to 56.7, while South Korean export demand expanded at its fastest pace in more than 15 years.

But the boom has another side.

According to Goldman Sachs estimates, the largest US hyperscalers are likely to invest around $800 billion this year. For 2027, that figure is already expected to reach $1.1 trillion.

Governments and technology companies are therefore competing for capital at the same time. The AI boom is supporting economic growth while simultaneously helping to keep bond yields and financing costs high.

That is the central contradiction of this trading week: The investments driving equity markets higher are also increasing pressure on capital markets.

Micron and Nike Reveal the New Divide

The contrast between Micron and Nike shows just how selective markets have become.

Micron is benefiting from demand that significantly exceeds available supply. Customers are securing capacity years in advance and, in some cases, making advance payments so that new factories can be built in the first place.

Nike, by contrast, is struggling with a more traditional combination of consumer weakness and brand problems. The company reported a roughly 4 percent decline in first-quarter revenue to $11.21 billion. In China, currency-adjusted sales plunged 26 percent – the ninth consecutive decline.

The company announced further job cuts and a reorganization of its regional operations. For the full year, Nike now expects revenue to fall by a high-single-digit percentage.

The difference is fundamental.

Micron can justify investment and higher costs because of exceptionally strong demand. Nike is facing more price-sensitive consumers, growing local competition and a lack of compelling new products.

High interest rates therefore do not affect every company equally. They sharpen the distinction between business models capable of growing despite rising costs and those whose structural weaknesses are now becoming increasingly visible.

Europe Feels the Energy Inflation Shock More Directly

While US inflation data provided some relief, the eurozone moved in the opposite direction.

Inflation jumped from 3.2 percent in August to 3.8 percent in September, above expectations of 3.6 percent. The main drivers were energy, natural gas, fuel and food.

Core inflation also edged up from 2.4 to 2.5 percent. That suggests price pressures have not yet become broadly entrenched. Nevertheless, the risk is growing that higher energy costs will eventually spill over into services and other consumer prices.

For the European Central Bank, this makes the situation more complicated.

On the one hand, inflation of 3.8 percent argues for further rate increases. On the other, long-term financing costs have already risen sharply. Another hike could put additional pressure on the economy and, in particular, on highly indebted countries.

Markets currently see another increase in December or early next year as more likely than an immediate move in October. How durable that expectation proves will increasingly depend on oil and gas prices.

For Germany, the picture remains divided. Parts of the industrial sector are benefiting from demand for AI, electronics and defense products. At the same time, higher energy costs are hitting an already weak domestic consumer economy.

The DAX is therefore caught between two worlds: global opportunities in technology and industry on the one hand, and a weak European domestic market on the other.

France Turns an Interest-Rate Problem Into a Political One

The new interest-rate reality is particularly visible in France.

The French government has presented its 2027 budget with spending cuts, setting the stage for weeks of political confrontation in a deeply divided parliament. At the same time, protests against austerity measures and the high cost of living are increasing pressure on the government.

The yield on 10-year French government bonds approached 5 percent this week, reaching its highest level since 2002. The spread over comparable German government bonds widened to its highest level since the eurozone debt crisis.

Three strains are now converging: higher energy costs, high public debt and political uncertainty.

For the ECB, France is therefore becoming not only an inflation issue but increasingly a financial-stability concern. Every additional rate increase raises refinancing costs. Yet refraining from further hikes could undermine confidence in the central bank’s commitment to controlling inflation.

The eurozone thus faces a more difficult balancing act than the United States. The US economy is still growing relatively robustly. In Europe, prices are rising faster despite weaker economic growth.

Oil’s Bottleneck Is Moving Downstream

The oil market once again saw sharp swings this week, but little clear direction.

Brent closed Friday at $102.25 a barrel, almost unchanged on the week with a gain of 0.11 percent. WTI lost 1.6 percent to finish at $91.11.

Prices had surged by more than 4 percent at times on Thursday. China suspended exports of oil products for October in order to secure domestic supplies. At the same time, new US troop movements in the Middle East intensified concerns about another military escalation involving Iran.

Friday brought a reversal. The G7 countries agreed to release a total of 100 million barrels of diesel and crude oil from strategic reserves. Europe is expected to bring a large share of the diesel onto the market within 20 days.

The move shows that the central problem is no longer simply the availability of crude oil.

Supplies from the Middle East have partly recovered. What remains scarce are refined products, particularly diesel. Damaged refineries, reduced exports from Russia and China’s export suspension are aggravating the situation.

The pressure point has therefore shifted from the oil field to the refinery.

For companies and consumers, that distinction matters. A stable crude price offers little relief if diesel, heating oil and other products remain expensive because of insufficient refining capacity.

Gold Loses Out to Real Yields

Gold once again failed to benefit from geopolitical risks.

Spot gold fell to around $4,140 an ounce on Friday, losing roughly 3.4 percent over the week. It was the precious metal’s second consecutive weekly decline.

War, inflation and political uncertainty would normally support gold. But US government bond yields above 5 percent change the equation.

Gold pays neither interest nor dividends. The higher the yield on safe government bonds, the greater the opportunity cost of holding it. At the same time, the dollar temporarily climbed to its highest level in 18 months, making gold more expensive for buyers outside the dollar area.

The euro fell below $1.13 for the first time since May 2025. In addition to the interest-rate differential, the currency is being weighed down by Europe’s dependence on energy imports and growing concerns about French public finances.

Gold is therefore telling the same story as the bond market: Geopolitical uncertainty alone is no longer enough when safe assets once again offer substantial running yields.

Money Is Not Leaving the Market – It Is Becoming More Selective

Despite rising bond yields, global equity funds attracted net inflows of $34.76 billion in the week to September 30. US funds received $20.6 billion, European funds $6.19 billion and Asian funds $6.16 billion.

At first glance, that suggests risk appetite remains strong.

The details tell a more cautious story. Technology funds recorded outflows of $2.63 billion after three consecutive weeks of inflows, while financial and utility funds attracted fresh capital.

Bond investors were also becoming more selective. Short-duration and government bond funds saw inflows, while investors withdrew $2.29 billion from high-yield bond funds.

Money is therefore not leaving the markets. It is moving into areas where investors believe risks can be assessed more clearly.

Equities remain attractive when companies deliver strong earnings growth. Government bonds remain attractive when they offer high yields with manageable default risk. The environment is becoming much more difficult for heavily indebted companies and governments whose growth cannot keep pace with their financing costs.

What This Trading Week Really Told Us

The weak US jobs report was neither a classic piece of bad news nor an unequivocally positive one.

It reduces the likelihood of another rate increase in October. At the same time, it raises the question of how long US consumers can maintain their current spending pace if wages are growing more slowly than prices.

Lower US inflation does not solve the problem either. It merely gives the Fed more time.

Long-term bond yields show that markets are no longer focused solely on the next central bank meeting. High energy prices, government debt and the enormous capital requirements of the AI industry have created an interest-rate environment that could remain tight for longer.

For equities, that does not automatically mean falling prices.

It means selection.

The Nasdaq can rise when Micron reports demand exceeding its available capacity. At the same time, Nike can fall as weaker consumers, problems in China and a lack of innovation weigh on sales.

Europe faces a tougher version of that selection process. Inflation is rising, the economy remains fragile and France demonstrates how quickly higher interest rates can turn a fiscal problem into a political one.

The common thread running through this week is therefore simple:

A possible rate pause may protect markets from an additional burden. It does not remove the burdens already in place.

What to Watch Next Week

On Monday, US services PMI data will provide the first indication of whether the cooling labor market is beginning to affect the largest part of the US economy.

German industrial orders for August are due on Tuesday. Following the recent improvement in orders, the key question will be whether the recovery is becoming broader or remains largely driven by individual large orders and future-oriented industries.

German industrial production follows on Wednesday, alongside the minutes of the Federal Reserve’s September meeting. Investors will be watching the Fed minutes closely for signs of how united policymakers were behind the first rate increase in three years and what conditions they set for another move in October or December.

On the corporate side, earnings season begins relatively quietly. PepsiCo reports on Thursday, followed by Delta Air Lines on Friday. PepsiCo will offer insight into how higher prices and stretched household budgets are affecting food and beverage consumption. At Delta, fuel costs and demand for air travel will be in focus.

In Europe, the French budget and movements in government bond yields remain key risks. In Japan, corporate surveys and Fast Retailing’s annual results will provide clues about how higher energy costs and a weak yen are affecting margins.

Above all of this hangs the oil market.

The release of strategic reserves may push prices lower in the short term. It does not solve the refining bottleneck or the conflict with Iran. If oil and diesel prices continue to fall, central banks would gain room to maneuver and bond markets could calm.

If prices rise again, hopes of a rate pause could disappear just as quickly as they emerged this week.

Stefanie S. Klief