US September nonfarm payrolls due next week may decide Fed's October rate hike

This week saw significant developments across international markets, with the highly anticipated meeting between Chinese and US leaders drawing global attention, while economic resilience strengthened expectations of further Federal Reserve rate hikes.

US Markets

US stocks recovered from early lows, with the Dow Jones Industrial Average gaining 0.29% for the week, the Nasdaq rising 2.06%, and the S&P 500 advancing 1.21%.

European Markets

Europe's three major indices also rebounded. The UK's FTSE 100 added 0.34% for the week, Germany's DAX 30 rose 0.41%, and France's CAC 40 edged up 0.16%.

Key Events Ahead

The US September employment report will be the central focus next week, as investors look to gauge the likelihood of a Fed rate hike in October. If implemented, this would mark the second consecutive increase. In Europe, eurozone inflation data will draw market attention and could influence future policy direction. Meanwhile, markets will continue to monitor the global bond sell-off and energy price volatility, with the Middle East conflict pushing up global price risks.

Nonfarm Payrolls in Focus

Amid heightened uncertainty in the Middle East, oil prices surged. The Fed raised interest rates by 25 basis points at its September meeting as expected, while signaling the possibility of further increases. Recent PMI surveys showed unexpectedly strong private sector activity in the US, prompting investors to raise expectations of another rate hike next month. According to LSEG data, money markets recently priced in a 64% probability of consecutive rate hikes on October 28.

The US September nonfarm payrolls report, due next Friday (October 2), will serve as a key signal to determine whether the US economy can withstand two consecutive rate increases. Before Friday's employment data, several other indicators will shed light on US labor market conditions: the August JOLTS job openings data, the September ADP private employment report, and weekly initial jobless claims.

James Knightley, economist at ING, said in a research note: "Two core reports will largely determine the Fed's decision. The first is the upcoming September employment report. The next key data point will be the September inflation report due on October 14." Knightley believes the employment data will likely remain resilient enough to keep the possibility of an October rate hike alive.

Another important data point is the August PCE inflation reading, the Fed's preferred inflation gauge. Analysts noted that adjustments to the new price index methodology could lower year-over-year comparisons for prior data. Other indicators worth watching include the second-quarter GDP final reading, the Conference Board's September consumer confidence index, and August factory orders.

A batch of corporate earnings reports is also due next week, which also marks the final three trading days of the month and the quarter. Companies to watch include Micron Technology, Accenture, Nike, McCormick, and Carnival Cruise Lines.

Oil and Gold

International oil prices experienced sharp volatility. The US and Iran resumed diplomatic consultations over the Strait of Hormuz, leading markets to expect a potential easing of tensions. However, ongoing threats to Middle East energy infrastructure continue to keep supply concerns at the forefront of investors' minds. WTI crude oil's near-month contract fell 3.82% for the week to $92.41 per barrel, while Brent crude's near-month contract rose 0.43% to $104.32 per barrel.

Diplomatic efforts to reopen navigation through the Strait of Hormuz still face obstacles. Qatar and other mediators plan to launch a new round of talks as early as next week in Oman. Meanwhile, Saudi Arabia and the UAE are urging the US to maintain economic pressure on Iran and not make concessions that could ease sanctions or lift the US naval blockade. France plans to deploy troops, radar, and defense systems to Saudi Arabia to protect a refinery at the Red Sea port of Yanbu.

Short-term physical crude oil supply remains tight. The Brent crude near-month spread remains around $4–5 per barrel, compared to less than $1 per barrel in February, reflecting tight spot supply. The International Energy Agency (IEA) said that since the conflict began, global monitored crude oil inventories have fallen by 507 million barrels, with August alone seeing a decline of 95 million barrels.

Rate hike expectations weighed on precious metals markets. COMEX gold futures for September delivery fell 2.27% for the week to $4,286.20 per ounce, while COMEX silver futures dropped 3.47% to $64.24 per ounce.

The US 10-year Treasury yield rose approximately 20 basis points this week, reaching levels not seen since 2007. Stronger-than-expected economic data reinforced market expectations that the Fed may raise rates at its October meeting.

Goldman Sachs lowered its end-2026 gold price target to $4,650 per ounce, while maintaining its end-2027 target at $5,400 per ounce. The bank believes the Fed is likely to raise rates once more in October, which, while slowing gold's advance, will not end the bull market. Global central bank gold purchases provide the strongest support and can offset weak ETF flows.

European Inflation in Focus

The eurozone's September preliminary inflation reading will be a key focus next week. Investors will watch to see whether high energy prices are transmitting through core inflation to other parts of the economy. So far, core inflation has not been significantly impacted by the Middle East turmoil.

The European Central Bank raised rates this month. According to LSEG data, money markets are pricing in up to four more 25-basis-point rate hikes from the ECB over the next year. Bert Colijn, economist at ING, noted in a report: "Markets will again focus on whether second-round inflation effects are beginning to emerge."

On Monday (September 28), ECB President Christine Lagarde will attend a hearing before the European Parliament's Economic and Monetary Affairs Committee, where her latest views on the economy and monetary policy will be closely watched.

Facing a similar situation to the ECB, if energy prices remain elevated, the probability of a November rate hike by the Bank of England could rise further with upcoming data releases.

Markets will also closely monitor the Labour Party conference, where Finance Minister John Healey and Prime Minister Andy Burnham are scheduled to speak. Given the UK's tight fiscal situation, any signs of concern ahead of the October 28 budget could push UK gilt yields higher.