U.S. equities were mixed as investors balanced a weak September employment report against ongoing inflation concerns and elevated oil prices which continued to push long-term Treasury yields higher. The S&P 500 slipped 0.3%, the Dow declined 1.3% and the Russell 2000 was essentially flat, while the Nasdaq Composite gained 0.5% and the S&P MidCap 400 rose 0.5%. Friday's rally following the employment report helped erase some of the week's earlier losses as investors took the news to mean that the Fed would be unlikely to hike rates further at its next meeting in October.

Sector performance was narrow as 8 of 11 SPX sectors were in the red with recent strength in the Technology sector (XLK), up 1.8% this week, to buoy the market cap weighted SPX. Energy (XLE) also gained, up 1.3%, on renewed fears of Iran war tensions and Utilities (XLU) gained 0.8% after having experienced steep losses over four of the past five weeks. Large-cap growth continued to outperform the broader market, reinforcing the importance of technology and AI-related companies to index-level returns, especially the Nasdaq which reached record territory during the week aided by a better than expected revenue outlook from Micron. Investors have continued to show a willingness to look through concerns about high valuations and financing costs when companies can demonstrate tangible exposure to the AI capital-spending cycle.

Friday's September employment report showed a meaningful slowdown in hiring as nonfarm payrolls increased just 29K, well below expectations of approximately 90K, while the unemployment rate ticked up to 4.2% from 4.1%. July and August payroll growth was also revised down by a combined 60,000 jobs. The report substantially reduced expectations for another Fed hike at the October meeting on the belief that the labor market is slowing rather than collapsing and the Fed would be loathe to act in front of the early November mid-term elections.

Additional labor indicators painted a similar picture as JOLTS job openings fell to 7.08 million from a revised 7.34 million in July, while consumer perceptions of labor market conditions weakened to their lowest level in more than five years. At the same time, weekly initial jobless claims remained below 200K, indicating that employers are not in a hurry to shed workers, suggesting that a broad deterioration in existing employment is not in the offing.

Inflation data also provided some relief for investors as the PCE price index increased 0.3% m/m in August and 3.4% y/y, while core PCE rose 0.2% m/m and 3.0% y/y. Both readings were softer than markets had feared and helped reduce the urgency for another immediate Fed hike, although both headline and core inflation remain well above the Fed's 2% target.

Q2 real GDP growth was revised up sharply to a 2.2% annualized rate from the earlier 1.5% estimate. Consumer spending grew 3.8%, while business investment remained strong, helped in part by continued investment in AI infrastructure and equipment. Real final sales to private domestic purchasers increased at a 4.6% annualized pace, suggesting that underlying domestic demand was considerably stronger than the headline GDP number alone indicated. The September ISM Manufacturing PMI registered 54.5, marking the ninth consecutive month of expansion. New orders and employment improved, but the prices paid index jumped to 77.9 from 71.1, its highest level since May. The economy therefore continues to send conflicting signals — hiring is slowing, but demand remains reasonably strong while input-price pressures remain elevated.

The 10-year Treasury yield reached approximately 5.34% during the week, its highest level in roughly 24 years, before easing after the employment report. Rising yields have reflected several forces at once: persistent inflation, stronger-than-expected underlying economic growth, heavy Treasury issuance, concerns about federal deficits and extraordinary capital requirements associated with the AI infrastructure buildout.

Brent crude traded above $108/barrel as hopes for progress in the U.S.-Iran conflict faded but increased crude shipments through the Strait of Hormuz improved and governments moved to release additional reserves. Diesel prices continued to move higher prompting the EU to begin to release their strategic reserves. Gold struggled amid higher real yields, falling roughly 3.4% for the week to around $4,140/oz.

European equities declined as rising oil prices and inflation concerns pressured government bond yields. The STOXX Europe 600 fell 1.1% in local-currency terms while Germany's DAX declined 0.7%, France's CAC 40 dropped and the UK's FTSE 100 lost more than 2%. France was a particular source of concern as investors focused on the government's fiscal outlook and its ability to reduce a large budget deficit.

Eurozone inflation accelerated to 3.8% y/y in September from 3.2% in August, above expectations of 3.6%. Inflation also accelerated across several major economies, reaching 3.3% in Germany, 3.0% in France and 4.9% in Spain. The stronger inflation data reinforced expectations that the ECB may need to keep policy restrictive. Concerns in France over the government's ability to pass a budget and reduce its fiscal deficit pushed French borrowing costs sharply higher and widened the spread between French and German 10-year bonds.

Japanese equities were mixed as the Nikkei 225 gained 2.9%, supported by AI and semiconductor-related stocks, while the broader TOPIX declined 0.9%. The divergence again demonstrated the global strength of technology oriented companies even as broader Japanese equities faced pressure from higher domestic yields and expectations for additional BoJ tightening. Tokyo-area core inflation accelerated to 2.7% y/y in September from 1.8% in August, while inflation excluding fresh food and energy reached 3.0%. That strengthened the case for further BoJ tightening. The 10-year Japanese government bond yield remained around 3.09%, while the yen traded near 157 per dollar. Policymakers continued to express concern about currency weakness.

Chinese equities weakened ahead of the Golden Week holiday. Through Wednesday, the Shanghai Composite fell 1.2% and the CSI 300 declined 1.8%, as technology and financial shares came under pressure from rising global yields and disappointment with Beijing's latest stimulus measures. Mainland Chinese markets then closed for the October 1–7 National Day holiday. Economic activity in China improved as the official manufacturing PMI increased to 50.1 in September from 49.8, returning to expansion. The official non-manufacturing index also returned to expansion at 50.2. Beijing announced additional support measures, including mortgage interest subsidies and expanded lending facilities, but investors remained skeptical that the package would be sufficient to resolve weak domestic demand and the economy's growing dependence on exports. Hong Kong's Hang Seng fell 2.19% for the week.