Capital markets digest

Market insights

Key inflation and jobs reports share the stage: August Personal Consumption Expenditures (PCE) inflation and September employment were the week’s headline prints, and both came in at or below expectations. Earlier releases had already set a soft tone, with Tuesday’s September Conference Board Consumer Confidence Index falling to 81.9 (Est. 89.0), its weakest reading since 2014 amid elevated energy prices and inflation worries. Labor demand also faded, as August JOLTS Job Openings fell to 7.08M (Est. 7.23M), the lowest since March. Inflation followed suit, as Wednesday’s August PCE Price Index rose 3.4% YoY (Est. 3.7%). Excluding food and energy, the August Core PCE Price Index rose 0.2% MoM (Est. 0.3%) and 3.0% YoY (Est. 3.3%). That said, much of the softness reflects methodology changes rather than lower prices, as the BEA’s revised treatment of software, legal fees and investment advice took an estimated 0.3% off core inflation. With June and July also revised lower, the three-month annualized core PCE rate is now running at roughly 2%, right at the Fed’s target. Friday’s September Nonfarm Payrolls report capped the week, with payrolls up just 29K (Est. 90K) and prior months revised down. While low, that is near the estimated breakeven pace of roughly 30K to 60K a month needed to keep unemployment from rising. Meanwhile, the September Unemployment Rate ticked up to 4.2% (Est. 4.1%), but for an encouraging reason. More people returned to the labor force to look for work, lifting the Labor Force Participation Rate to 61.8% (Est. 61.6%) from 61.6%. Even so, participation remains below last year’s 62.4% close. Wage growth also cooled, with September Average Hourly Earnings rising 3.0% YoY (Est. 3.1%), the lowest since May 2021, reinforcing the Fed’s view that wages are not a major driver of inflation. Against that backdrop, Fed speakers struck a mostly patient tone. NY Fed President Williams said last Tuesday that “there is no need for urgency” after the September hike and that the Fed has “time to gather more information.” On the energy front, Brent crude fell roughly 2% on the week to about $102 a barrel after the G7 confirmed a coordinated release of emergency oil reserves.

The long end hits a 24-year high: Treasury yields climbed through midweek, led by the long end, and then partially retraced as last week’s primary data came in softer. The 10-year Treasury yield rose from 5.16% at the prior Friday’s close to an intraday high of about 5.34% on Thursday, its highest since 2002, and closed the week at 5.27%. Rising energy prices, sticky inflation, resilient domestic growth and capital flows to corporate and foreign government assets all weighed on long-term Treasuries. The front end moved the other way, as the 2-year yield fell from 4.85% at the prior Friday’s close to 4.82%. The drop in shorter duration yields was driven by shifting monetary policy expectations for October. The CME FedWatch Tool showed October hike odds falling to roughly 20% as of this writing from roughly 65% a week earlier, which helped pull the 2-year yield lower. Dallas Fed President Logan added a policy angle, noting in remarks last Thursday at a Dallas Fed event that “higher term premiums can slow the economy, reducing the need to tighten monetary policy.” Overall, the 2-to-10-year Treasury curve steepened from roughly 31 bps at the beginning of the week to roughly 44 bps by Friday’s close. This was a steepening twist, as long-term yields rose while short-term yields fell. The pressure is not unique to the US, as global yields continue to rise, adding further competition to US debt for foreign investors.

Cross-asset widening continues: Fixed income markets, including Agency CMBS, grew even more cautious last week as the rapid rise in global yields pushed credit spreads wider across sectors. The conclusion of Month/Quarter end pricing helped to keep trading activity elevated with Fannie Mae DUS/MBS new issuance volumes topping $1.1 billion. Freddie Mac Participation Certificates (PCs), which are structured similarly to Fannie Mae DUS/MBS, saw just $75 million in volume, representing a single 7/6.5 deal. Elsewhere, Freddie Mac priced its roughly $809 million K-F174 floating-rate K-deal last Thursday, roughly 7 bps wider than its last floater K-deal transaction. The flush out of volumes over the last 10-trading days in conjunction with the heightened volatility in fixed-income markets helped pushed investor spreads to their highest levels since the beginning of the year. New issue Fannie Mae DUS/MBS investor spreads widened an eyebrow-raising 4 to 5 bps across the 5/4.5, 7/6.5 and 10/9.5 standard structures, which brings the widening to roughly 8 to 10 bps over the past two weeks. Last week marked the largest weekly widening since the April 2025 “Liberation Day” reciprocal tariff announcement. For additional context, in January the FHFA directed the GSE Agencies to purchase $200 billion of residential MBS, which catalyzed tightening in Agency CMBS investor spreads to their narrowest levels in years. Agency CMBS investor spreads have now given back that move, pushing out to their widest levels since early January. Corporate credit spreads, by comparison, remain wider than where they started the year. As of last Friday’s close, the Bloomberg Single A Industrials 10-year Index (~67 bps) and the Markit CDX Investment Grade 5-year Index (~60 bps) are both roughly 10 bps wider YTD. Fannie Mae DUS/MBS may be holding up better than other fixed income sectors, such as residential MBS, because its prepayment protection tends to make cash flows more predictable, and bond investors are willing to pay up for that. On corporate credit, investment-grade issuance totaled roughly $32.6 billion (Est. $50 billion) as elevated funding costs prompted many issuers to stand down.

Week ahead: It is a light week for primary data prints, so attention shifts to the Fed and Treasury supply. This Monday’s September ISM Services PMI slipped to 54.9 (Est. 55.0) from 55.4, signaling continued expansion at a slightly slower pace. Cost pressures were the bigger story of the release, as the September prices paid subcomponent rose to its highest level since July 2022. Steve Miller, chair of ISM’s Services Business Survey Committee, said “Tariffs and fuel cost impacts were the most cited issues impacting respondents’ supply chains; in fact, fuel costs were mentioned twice as often as any other single issue impacting performance.”

From there, attention turns to Wednesday’s September 16^th FOMC Meeting Minutes, which should shed more light on the committee’s framework behind the September hike. The FOMC voted unanimously to raise rates by 25 bps to a 3.75%–4.00% range, its first hike since 2023. Chairman Warsh said the Fed must be confident that underlying inflation is moving to its objective “clearly and at sufficient speed,” a standard the committee judged had not been met. Officials also saw inflation risks tilted to the upside, with labor market risks roughly balanced. The median projection calls for one more hike this year, and the minutes may also show broad support for further hikes. However, the minutes predate the softer August PCE revisions and the September jobs report, so a potentially hawkish tone may carry less weight. Fed speakers will also be in focus before the FOMC blackout period begins October 17^th ahead of the October 27^th–28^th meeting, as markets watch whether Fed officials validate the pullback in October hike odds that followed the softer inflation and jobs data. On the labor front, Thursday’s Initial Jobless Claims are expected to stay low, pointing to a labor market cooling through slower hiring rather than layoffs. The week wraps up with Friday’s October Preliminary University of Michigan Consumer Sentiment report, which is expected to edge lower and includes 1-year inflation expectations.

In credit markets, roughly $25 billion to $30 billion of new corporate issuance is expected this week, a slightly slower pace than last week. Treasury supply is another key test, as Treasury sells $58 billion in 3-year notes Tuesday, $39 billion in 10-year notes (reopening) Wednesday and $22 billion in 30-year bonds (reopening) Thursday, with yields near multi-decade highs. Looking further out, with an October hike still in question, the September CPI report due October 14^th is the next major data checkpoint before the FOMC meeting, arriving the same week Q3 bank earnings offer a read on credit quality and loan demand.

Economic Calendar: (Week of 10.05.2026 – 10.09.2026):

10/05: Monday

• Sep Final: S&P Global US Services PMI (Est. 58.7, Actual. 58.8, Prev. 58.7)
• Sep: ISM Services Index (Est. 55.0, Actual. 54.9, Prev. 55.4)

10/06: Tuesday

• Week of Sep 19^th: ADP Weekly Employment Change (Prev. 20K)
• Treasury Auction: $58 billion 3-year notes

10/07: Wednesday

• Treasury Auction: $39 billion 10-year notes reopening
• Sep 16^th: FOMC Meeting Minutes

10/08: Thursday

• Week of Oct 3^rd: Initial Jobless Claims (Est. 200K, Prev. 197K)
• Week of Oct 3^rd: Initial Claims 4-Wk Moving Avg (Prev. 200K)
• Week of Sep 26^th: Continuing Claims (Est. 1,700K, Prev. 1,701K)
• Treasury Auction: $22 billion 30-year bond reopening

10/09: Friday

• Oct Preliminary: U. of Mich. 1 Yr Inflation (Prev. 4.60%)
• Oct Preliminary: U. of Mich. Sentiment (Est. 47.7, Prev. 48.1)