An unexpected cooling in the US labor market sent Treasury yields lower, lifted US stock futures, and further reduced expectations for a Federal Reserve rate hike in October.

Data released Friday by the Labor Department showed nonfarm payrolls rose by just 29,000 in September, far below the 90,000 consensus estimate and beneath the lowest end of all forecast ranges. The unemployment rate edged up to 4.2% from 4.1% in August.

Following the data, Treasury yields fell across the curve, US stock futures strengthened, and interest rate markets sharply scaled back pricing for an October Fed rate hike.

Interest rate swap markets showed that after the release, traders' probability expectations for a Fed hike at the October meeting dropped to 17% from 22% previously, while the cumulative hike premium for the remaining two meetings this year fell to about 21 basis points.

The two-year Treasury yield dropped about 10 basis points on the day to 4.69%. S&P 500 futures rose 0.8%, while Nasdaq 100 futures gained 1.1%.

Calendar effects may be the main cause, with no substantive deterioration in the job market

Economists widely believe that the unusually weak September employment data likely stemmed mainly from distortions in seasonal adjustment factors rather than a substantive shift in the labor market.

According to Reuters, this year's Labor Day holiday fell at the end of the month, a situation that historically tends to depress nonfarm payroll figures. At the same time, the government's seasonal adjustment model is believed to have both suppressed September job gains and led to a downward revision of August data to 133,000 from the previously reported 162,000.

The distribution of September employment forecasts ranged from 35,000 to 180,000, with the dispersion itself reflecting analysts' anticipation of data disturbances.

The underlying fundamentals of the current job market remain resilient. Initial jobless claims continue to hover near 57-year lows, corporate profits are solid, domestic demand is strong, and there are no signs of large-scale layoffs.

Employment structure diverges, with some sectors still expanding

In terms of industry composition, the weakness in September employment was mainly dragged down by job losses in government, information, professional and business services, and financial activities.

Meanwhile, healthcare, construction, and manufacturing still posted net job gains, indicating that labor demand in some parts of the real economy remains stable.

According to Bloomberg, the rise in the unemployment rate to 4.2% was partly due to the natural expansion of the labor force. Economists estimate that the economy currently needs to add 50,000 to 80,000 jobs per month to keep pace with growth in the working-age population.

A continuing wave of retirements and the Trump administration's strict immigration controls have compressed labor supply, objectively providing some support for the rise in the unemployment rate.

War, energy prices, and tariffs pose lingering risks ahead

Economists remain cautious about the outlook for the coming quarters.

Energy price increases and supply chain strains from the US-Israel war with Iran are expected to begin exerting a substantive impact on the job market from the end of this year through 2027. Diesel prices have already hit record highs, and potential pass-through pressure is gradually spreading beyond transportation and agriculture.

In addition, ongoing tariff frictions are also worrying businesses. A survey released Thursday by the Institute for Supply Management (ISM) showed that manufacturers' concerns about the trade dispute with Canada continue to intensify, which could further dampen companies' willingness to expand production and hiring.

Softer inflation data combined with cooling employment puts rate hike expectations under renewed pressure

Before the employment data was released, the Fed last month raised its benchmark overnight rate by 25 basis points to a range of 3.75% to 4.00%, the first hike in three years, and signaled further tightening.

However, inflation data for July and August came in below expectations in succession, already pulling back the probability of another hike in October.

The CME FedWatch tool showed that before the employment report was released, the market priced about a 22% chance of a Fed rate hike at the October 27-28 meeting, down sharply from about 69% a week earlier. After the September employment data was published, that probability fell further to around 17%, and the market no longer fully priced in one rate hike before year-end.