U.S. equities were relatively strong, led by gains in technology and semiconductors. The S&P 500 and Nasdaq briefly hit record highs, while the Philadelphia Semiconductor Index posted even sharper gains. The rally continued after September’s nonfarm payrolls slowed, which strengthened expectations that the Fed would hold rates steady in October. In contrast, European equities fell as concerns over France’s debt risks and political instability weighed on French stocks. In Japan, a rebound in semiconductors and financials pushed the Nikkei briefly back above the 70,000 mark. Hong Kong stocks also weakened as trading volume thinned while mainland Chinese markets were closed for the National Day holiday.
The 10-year Treasury yield fell sharply for a time after the September nonfarm payrolls release. However, the prices paid component of the latest ISM services index rebounded from the previous month and reached its highest level since July 2022. The jump reflects higher transportation and raw material costs, and it suggests inflation pressure may keep spreading to other industries. Treasury yields rebounded as a result and stayed near their highs. With rates swinging at elevated levels, most bond markets saw more declines than gains.
The U.S. economy remains resilient, but inflation pressure persists. The September ISM services index showed steady domestic demand, while input cost pressure on businesses increased. Meanwhile, geopolitical tensions have driven a sharp rise in U.S. diesel prices. Diesel is a key fuel for trucking, agriculture, and manufacturing, so if prices stay high, they could add further inflation pressure. The Fed is leaning hawkish, and inflation is cooling more slowly than expected, so another rate hike remains possible before year-end.
The U.S. midterm elections are less than a month away. According to Polymarket odds, the House race looks fairly clear, with Democrats having over a 90% chance of taking control. The Senate race is less certain, though. The lead has gone back and forth between the two parties this year. Democrats’ odds of winning the Senate have been rising, but with the campaigns entering the final stretch, it remains to be seen whether they will control the Senate as well. Ahead of the vote, the two parties’ different policy priorities point to different potential winning sectors. That uncertainty may keep investors from making big bets on equities.
In September, the BoJ raised rates by 25 bp. It said underlying CPI inflation is close to 2% and that it will keep raising rates, so its policy focus is shifting toward keeping inflation from overshooting the target. Two board members voted against the hike, though, and Governor Kazuo Ueda sounded fairly neutral after the meeting. Markets therefore saw the hike as less hawkish than expected and doubted that the U.S.-Japan rate gap would narrow quickly. As a result, the yen weakened after the September meeting in a “sell-the-news” reaction.
