The Fed Has More Time — Not More Certainty

Persian Gulf: Oil Prices Ease, Physical Risk Remains

Energy markets begin the week in a somewhat more balanced position.

Brent crude has fallen towards USD 102/bbl, supported by improving Middle Eastern export flows and the decision by G7 countries to release approximately 100 million barrels of crude oil and refined products from emergency reserves.

OPEC+ also opted over the weekend to keep November production targets unchanged.

On the surface, these developments provide welcome relief.

However, the underlying market remains considerably less comfortable than the headline price move suggests.

Gulf producers continue to operate materially below pre-conflict production levels, while shipping through the Strait of Hormuz remains vulnerable to renewed attacks and logistical disruption.

Middle Eastern crude exports have improved meaningfully in recent days, but the recovery remains uneven and the physical supply chain continues to carry a geopolitical premium.

The implication is important.

Oil is no longer trading exclusively on the current level of physical supply. It is increasingly pricing the probability that supply normalisation can continue without another escalation.

That creates an asymmetric risk profile.

A sustained reopening of regional energy flows could push Brent lower and remove an important source of global inflation pressure.

Conversely, renewed attacks on shipping or infrastructure could quickly reverse the recent decline.

For central banks, the key variable is therefore not simply today’s oil price, but whether the energy shock proves temporary or persistent.

US Macro Data

Labour market: a clear loss of momentum

The September employment report materially changed the near-term monetary policy debate.

US non-farm payrolls increased by just 29,000, far below consensus expectations.

The weakness was reinforced by downward revisions to July and August, reducing previously reported job creation by a combined 60,000 positions.

The unemployment rate increased from 4.1% to 4.2%, while labour-force participation rose to 61.8%.

Importantly, wage pressures also moderated.

Average hourly earnings increased by only 0.1% month-on-month and 3.0% year-on-year, the slowest annual pace in several years. US Bureau of Labor Statistics

This combination — weaker job creation, higher labour participation and moderating wages — provides the Federal Reserve with substantially more flexibility.

However, the data should not yet be interpreted as evidence of a rapidly deteriorating labour market.

Layoffs remain comparatively low and the weakness still resembles a low-hire, low-fire environment rather than the beginning of a conventional recessionary employment cycle.

Inflation: better, but still not comfortable

The Federal Reserve received somewhat more encouraging inflation news.

Headline PCE prices increased by 0.3% MoM in August, while core PCE rose by 0.2%, below expectations.

On an annual basis, headline inflation stood at 3.4%, while core inflation remained at 3.0%. US Bureau of Economic Analysis

The direction is constructive.

The level is not.

Inflation remains meaningfully above the Federal Reserve’s 2% target and the renewed energy shock continues to present a risk to the disinflation process.

The most important development may therefore be that the Fed can now afford to wait rather than that it has obtained room to ease.

Consumer spending remains surprisingly strong

The consumer continues to complicate the picture.

Personal consumption expenditure increased by 0.9% in August, substantially outpacing the 0.2% increase in personal income.

Real spending also remained strong.

This indicates that household demand continues to provide significant support to economic activity despite higher borrowing costs and deteriorating consumer sentiment.

However, the divergence between spending and income deserves attention.

A consumer increasingly reliant on lower savings or additional borrowing becomes progressively more sensitive to employment conditions, interest rates and energy costs.

Manufacturing remains resilient

US manufacturing activity continued to expand in September.

The ISM Manufacturing PMI stood at 54.5, marking a ninth consecutive month of expansion.

New orders strengthened to 55.3 and employment remained above the 50 threshold.

The more important signal came from prices.

The ISM Prices Paid Index jumped to 77.9, from 71.1 in August.

This reinforces a key theme for investors: weaker employment does not automatically mean lower inflation.

The US economy is increasingly displaying a divergence between softer labour demand and persistent upstream cost pressures.

Eurozone Macro Data

Inflation accelerates sharply

Europe faces a significantly more difficult inflation environment.

Eurozone headline inflation accelerated from 3.2% in August to 3.8% in September, materially above the European Central Bank’s target.

Energy inflation reached 18.8% year-on-year, making it by far the largest contributor to the acceleration.

Core inflation excluding energy, food, alcohol and tobacco remained considerably lower at 2.5%, but services inflation also moved higher. Eurostat

This distinction matters.

The current inflation shock remains predominantly energy-driven, but the longer energy prices remain elevated, the greater the probability that second-round effects emerge across wages, transportation and services.

That explains why the ECB remains reluctant to declare the inflation problem contained.

Industrial activity continues to improve

The growth picture is more constructive.

Eurozone manufacturing PMI increased to 52.9 in September, its strongest level in more than four years.

Investment-goods demand has been particularly strong, supported by spending on machinery, defence and artificial-intelligence-related infrastructure.

Europe therefore faces an unusual policy combination:

activity is improving at the same time that inflation is accelerating.

That makes monetary policy considerably more difficult.

France introduces a new sovereign-risk dimension

France has also become increasingly important to the European market narrative.

The French 10-year government bond yield has moved close to 4.9%, while the spread over German Bunds has widened materially as investors reassess the country’s fiscal trajectory and political capacity to implement the 2027 budget.

This is not currently a funding crisis.

It is, however, a reminder that sovereign-risk differentiation is returning to the Eurozone.

At higher global yields, fiscal credibility increasingly matters.

Countries with large deficits and rising debt burdens must compete for capital in a market where investors can already obtain attractive returns from high-quality sovereign issuers.

This dynamic deserves close attention as Europe enters its next fiscal cycle.

UK Macro Data

UK manufacturing remained in expansion territory during September, with the headline PMI increasing slightly to 51.9.

However, the composition of the survey was less reassuring.

Output growth slowed while input-cost pressures increased for the first time in several months.

This reflects the same challenge visible elsewhere in Europe: economic activity remains resilient, but higher energy and supply-chain costs are beginning to reappear within corporate pricing structures.

Markets continue to expect the Bank of England to retain a restrictive bias, particularly if energy inflation feeds more broadly into domestic prices.

The UK’s vulnerability is also visible in the bond market.

Long-term gilt yields remain elevated, increasing financing costs for households, businesses and the government simultaneously.

Switzerland Macro Data

Switzerland continues to offer one of the more favourable inflation profiles among developed economies.

Consumer prices were unchanged month-on-month in September, while annual inflation increased to 1.0%.

Higher heating-oil, petrol and diesel prices were offset by lower prices across travel and accommodation categories. Swiss Federal Statistical Office

The increase nevertheless shows that Switzerland is not completely insulated from the global energy shock.

For the Swiss National Bank, the current environment remains considerably more comfortable than for the Fed, ECB or Bank of England.

Inflation remains well within a range consistent with price stability, preserving meaningful policy flexibility.

That relative stability continues to reinforce the defensive characteristics of Swiss assets and the Swiss franc within internationally diversified portfolios.

Japan Macro Data

Japan continues to move in the opposite monetary direction from much of the developed world.

The latest Bank of Japan Tankan survey showed further improvement in business sentiment.

Confidence among large manufacturers increased to +24, while sentiment among large non-manufacturers remained exceptionally strong at +35.

More importantly, Japanese companies continue to expect inflation to remain above the Bank of Japan’s 2% target over the medium term.

This provides further support for the BoJ’s gradual monetary normalisation.

Japan therefore remains one of the few major markets where the question is not whether restrictive policy will be maintained, but how quickly interest rates can be normalised without destabilising growth or the government-bond market.

The implications extend beyond Japan.

Higher domestic yields reduce incentives for Japanese investors to hold foreign bonds and could gradually alter global capital flows.

China Macro Data

China ended the third quarter on a more constructive note.

The official manufacturing PMI rose to 50.1 in September, returning to expansion after two consecutive months below the 50 threshold.

The private-sector RatingDog manufacturing survey was stronger still at 52.1.

Services activity also improved, with the RatingDog Services PMI reaching 51.6 and the broader composite index rising to 52.4.

These indicators suggest that the Chinese economy is stabilising.

However, the recovery remains uneven.

Industrial activity and high-technology exports continue to benefit from global AI investment, while domestic consumption and property remain considerably less dynamic.

Beijing retains greater room for policy support than most Western economies because consumer inflation remains comparatively subdued.

The central question entering the fourth quarter is whether improving industrial activity can eventually generate stronger household demand and private-sector confidence.

Chinese financial markets remain closed for the Golden Week holiday and are scheduled to reopen later this week.

Central Banks and Monetary Policy

The immediate pressure on the Federal Reserve has declined.

The Fed raised its policy rate by 25 basis points in September to 3.75%–4.00%, its first increase since 2023.

At the time, persistent inflation and resilient employment strengthened the case for additional tightening.

The latest data materially complicate that trajectory.

Following the September employment report, market expectations for another October increase have fallen sharply.

The Federal Reserve therefore enters the next phase of the cycle with more time — but not necessarily more certainty.

Inflation remains above target, manufacturing price pressures are elevated and consumer demand remains resilient.

The most likely policy response is therefore patience rather than an immediate reversal of the tightening cycle.

In Europe, the ECB’s challenge is arguably more difficult.

The deposit rate currently stands at 2.50%, following September’s increase, while inflation has now accelerated to 3.8%.

Thursday’s publication of the ECB’s September meeting account will therefore be closely scrutinised for evidence of how policymakers assess the risk of a more persistent energy-driven inflation shock.

Japan remains the outlier, with the Bank of Japan maintaining a tightening bias as domestic inflation expectations become more firmly established.

The broader conclusion is clear:

global monetary policy is becoming increasingly asynchronous.

That creates both volatility and opportunity across currencies, sovereign curves and regional equity markets.

Fund Flows

Investor allocations remain surprisingly constructive despite elevated yields.

Global equity funds attracted approximately USD 34.8 billion during the latest reported week, marking a second consecutive week of inflows.

US equity funds accounted for approximately USD 20.6 billion, with large-cap strategies absorbing the majority of those allocations.

At the same time, US bond funds attracted around USD 6.5 billion, including strong demand for short- and intermediate-duration government securities.

The coexistence of equity and fixed-income inflows is significant.

Investors are not abandoning risk assets.

Rather, they appear to be building more balanced portfolios: maintaining exposure to structural growth themes while simultaneously locking in historically attractive bond yields.

This represents an important evolution in portfolio construction.

For more than a decade, investors were frequently forced to choose equities because fixed income offered insufficient return.

That is no longer the case.

US Equity Markets

The US equity market continues to display significant internal divergence.

The S&P 500 declined approximately 0.3% last week, while the Dow fell around 1.3%.

The Nasdaq, however, gained approximately 0.5% and reached a new record high following Friday’s weaker employment report.

The message is important.

Investors continue to reward artificial intelligence, semiconductors and selected technology companies despite significantly higher discount rates.

Yet market breadth remains less convincing.

The current environment therefore continues to favour companies capable of demonstrating a credible relationship between capital expenditure and future cash generation.

The AI investment cycle remains structurally important, but financing conditions are increasingly forcing the market to distinguish between businesses benefiting from genuine productivity improvements and those relying primarily on narrative or multiple expansion.

At sovereign yields above 5%, that distinction becomes progressively more important.

The Week Ahead

Monday | 5 October

Final September services and composite PMI surveys are released across Europe and the United Kingdom.

In the United States, attention turns to the S&P Global Services PMI and, more importantly, the ISM Services Index, providing an updated view of activity and price pressures across the largest component of the US economy.

Eurozone producer-price data will also provide additional evidence on the transmission of higher energy costs.

Tuesday | 6 October

Eurozone retail sales will provide an updated assessment of household consumption.

Germany releases factory-order data, while the United States publishes its August trade balance.

The UK construction PMI will offer further insight into interest-rate-sensitive domestic activity.

Wednesday | 7 October

The Federal Reserve publishes the minutes of its September meeting, when policymakers raised the federal funds target range to 3.75%–4.00%.

Markets will focus on how broad the support for further tightening was before the latest deterioration in employment data.

The minutes should help investors assess whether September represented the beginning of a renewed tightening cycle or a more limited recalibration.

Thursday | 8 October

The European Central Bank publishes the account of its September monetary-policy meeting.

Given the subsequent acceleration in Eurozone inflation, investors will examine policymakers’ assessment of energy prices, second-round inflation risks and the potential need for additional tightening.

US weekly jobless claims will also provide an important test of whether September’s weak payroll report represents a broader deterioration in employment conditions.

Friday | 9 October

The preliminary University of Michigan Consumer Sentiment Survey for October will be the principal US release.

September sentiment fell to 48.1, reflecting growing concern over inflation, energy costs and household finances.

Markets will therefore pay particular attention to inflation expectations and whether weaker labour-market conditions are beginning to affect household confidence further.

Investment Perspective

The latest data have reduced one important risk without resolving the broader investment challenge.

The probability of an immediate Federal Reserve rate increase has declined meaningfully following softer employment and inflation data.

That is supportive for risk assets.

But it does not imply a return to the monetary environment that prevailed earlier in the cycle.

The US 10-year Treasury yield remains above 5%.

Eurozone inflation is approaching 4%.

Oil remains above USD 100 per barrel.

And global central banks continue to operate against a background of unusually persistent geopolitical and fiscal uncertainty.

For portfolio construction, this argues for maintaining a balanced rather than binary approach.

Equities continue to offer attractive structural opportunities, particularly where earnings visibility, productivity gains and strong balance sheets justify current valuations.

However, high-quality fixed income now provides a meaningful source of portfolio return and diversification.

Within equities, the emphasis should remain on free-cash-flow generation, pricing power, return on invested capital and limited refinancing dependency.

Within fixed income, short- and intermediate-duration sovereign exposure remains attractive, while long duration requires greater discipline given inflation and fiscal uncertainty.

Infrastructure and energy security remain structurally relevant, particularly as AI-related electricity demand and geopolitical fragmentation increase the strategic importance of physical assets.

Private-market underwriting must continue to reflect a structurally higher cost of capital rather than assuming a rapid return to the financing conditions of the previous decade.

And liquidity remains strategically valuable in an environment where dispersion is likely to continue creating opportunities.

The broader conclusion is therefore not that financial conditions are becoming easy.

It is that policymakers now have more room to observe before acting.

For markets, that distinction is constructive — but it is not the same as certainty.

The Fed has gained time. Investors should use it to reassess where risk is genuinely being compensated.