October Fed Hike Odds Collapse to 17% After Jobs Shock

Traders slashed the probability of an October Fed rate hike to as low as 17% after September's weak jobs report, powering the Nasdaq to record highs.

A weaker-than-expected September jobs report altered traders' outlook for a Federal Reserve rate hike in October, which is now seen as extremely unlikely. CME's FedWatch tool shows only a 17% chance that the Fed increases rates by a quarter percentage point, down from close to 36% a week ago. On prediction market platform Kalshi, the chance of an October hike stood at just 18%, down from almost 70% a week earlier — one of the sharpest single-event repricings in recent Fed expectations history, per the Kobeissi Letter via KuCoin. The Fed's next decision comes at the close of a two-day meeting on Oct. 28.

The speed of the reversal is what stands out. Polymarket's 'Fed Decision in October?' contract saw the probability of a 25 basis point hike plunge from the high-70s range to 17%, while the 'no change' probability surged to 83% — with more than $23.1 million in volume logged, according to the Kobeissi Letter as reported by KuCoin. That means markets repriced the October decision from near-certain hike to near-certain hold within days. The Kobeissi Letter noted the bond market is experiencing 'insane volatility' as traders unwind rate-hike positioning at speed.

The U.S. economy added only 29,000 jobs in September, below estimates for a gain of more than 80,000, and the unemployment rate ticked up to 4.2%. The cool jobs report follows a softer-than-expected inflation report released Wednesday: the personal consumption expenditures price index, the Fed's preferred gauge, showed core prices excluding food and energy rose 3% in August, lighter than consensus estimates for a rise of 3.3%. 'This report strengthens the case for the Federal Reserve to remain patient,' said Adam Schickling, a senior economist at Vanguard, adding that the labor market has neither deteriorated sharply nor meaningfully strengthened.

Rate-hike relief flowed straight into equities. Benzinga reports via TradingView that the Nasdaq 100 gained 1.1% to 30,825 and the S&P 500 rose 0.6% to 7,714, with the Dow up 0.3% to about 51,066, as chip stocks led the move and Nvidia hit a record high at $237.88 per share. Treasury yields tumbled on the data, easing pressure on equities, though Reuters notes the bond market later resumed a selloff that has pushed global yields to levels not seen in two decades, with the 10-year yield up nearly 5 basis points at 5.283%.

While traders now think an October hike is unlikely, they are still forecasting that the central bank will raise rates in December. On FedWatch, odds are above 75% for a December hike, while Kalshi puts the probability at 65%, per CNBC. 'The Federal Reserve may decide to pause in October,' said Preston Caldwell, chief US economist at Morningstar, adding that one rate hike before the end of the year remains likely. Macquarie's David Doyle also expects the Fed to wait until December, saying the evidence supports the view that underlying inflation is moving in the right direction.

With a hold in October now the dominant market expectation, attention turns to the Fed's Oct. 28 decision and the data that will land before it. Analysts said the September slowdown gives policymakers greater room to leave rates unchanged without worrying about the economy overheating. 'The labor market remains fundamentally healthy,' said Macquarie's Doyle, pointing to a rise in labor force participation and job gains in cyclical sectors such as construction and manufacturing. Morningstar's Caldwell said the Fed will turn to other economic data to guide its rate decisions over the coming months.