2026 Weekly Update

Market update

The S&P 500 closed the week at 7’722.72, -0.27% lower. The Dow Jones closed at 51’176.96, -1.26%, with the Nasdaq higher by +0.45%. The volatility index VIX closed the week at 15.31, up from 14.87. The Euro Stoxx 600 fell -1.14%. 

The 10-year UST closed at 5.27%, up from 5.16% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 117bps. US Corporate Bond spreads: Investment Grade spreads widened 8bps at 88bps and High Yield spreads widened 39bps at 354bps. German 10-year Bunds yield closed at +3.46% down from +3.60% a week before. In Europe, Corporate Investment Grade spreads widened 9bps at 108bps and High Yield widened 37bps at 359bps. 

The US Dollar Index (DXY) appreciated +0.95% last week and closed at 101.93. The Euro closed at 1.1255 (-1.19%); the Yen depreciated -0.36%, closing at 157.85 and the Swiss Franc depreciated -0.06%, closing at 0.8288. Gold closed at $4’141.19, depreciating -3.35%. Oil was lower, Brent closed at $102.25 (-1.98%) and WTI at $91.11 (-1.41%).

Macroeconomy

The Fed

There was no FOMC meeting this week, but Fed speakers pushed back on the idea of an immediate follow-up to September's hike. NY Fed President Williams said one more hike "late this year" looked appropriate but saw no urgency, Vice Chair Jefferson said deciding on further hikes "may take more time", and Governor Bowman saw no urgent need for action. Governor Barr still signaled further hikes are likely, and St. Louis Fed President Musalem described policy as still somewhat accommodative. Together with the softer PCE revisions and a weak payrolls headline, this cut the market-implied probability of an October hike from around 70% on Monday to roughly 30% by Thursday's close. In our view, the Fed cares more about inflation than employment at this stage, with core PCE still about one percentage point above target. Our base case remains one further hike in December. Separately, President Trump said Jerome Powell "should be forced to resign" from the Board following an Inspector General report on the headquarters renovation; Powell's term as Governor runs to January 2028. The CPI release on 14 October will be the next key test.

US data

The September jobs report was weak on the headline but mixed underneath. Nonfarm payrolls rose 29k (vs. 90k expected), down from a revised 133k in August, with private employment up 46k and government shedding 17k; July and August were revised down by a combined 60k. Average hourly earnings rose only 0.1% m-o-m and 3.0% y-o-y, and the unemployment rate edged up to 4.2%. The household survey, however, was strong: employment jumped 406k and the participation rate rose 0.2pp to 61.8%, lifting the labor force by around 485k. Weekly initial jobless claims fell to a 10-week low of 197k and continuing claims to a three-and-a-half-year low of 1.701m. Annual revisions lifted first-half GDP growth to 2.4% from 1.8%, mainly on stronger consumer spending, while higher income pushed the savings rate up to 4% from 3%. Nominal GDP growth remains firm at about 6% y-o-y. Core PCE rose 0.25% m-o-m in August, but revisions cut the year-on-year rate to 3.0% (vs. 3.3% expected) and the three-month annualized pace to around 2%, its softest since July 2024. The revisions mostly reflect methodological changes in financial services, with some contribution from AI-related goods and software, while supercore services inflation has stabilized rather than continued to fall. The ISM manufacturing index came in at 54.5 (vs. 55.0 expected), with prices paid surging to 77.9 (vs. 73.0), likely reflecting energy pass-through, and employment improving to 52.7. Softer spots included job openings at a five-month low of 7.08m and Conference Board consumer confidence falling to 81.9 (vs. 89.0 expected).

European Central Bank

Euro area headline HICP inflation rose to 3.8% y-o-y in September from 3.2% in August, in line with our estimate based on national releases, which had all surprised on the upside (Germany 3.3%, France 3.4%, Italy 4.1%). The increase mainly reflected higher energy prices, but food inflation also strengthened for the first time since April, partly due to the impact of summer heatwaves on autumn crops. More concerningly, core inflation rose more than expected to 2.5% from 2.4%, with services inflation up to 3.2% from 3.0% and non-energy industrial goods broadly stable at 1.1%. Part of the core increase likely reflects a rebound after a weak August reading in some countries, but inflation momentum remains strong and we continue to expect headline inflation to reach 4% in the coming months. At the same time, the sharp widening in peripheral spreads tightened financial conditions, raising doubts about how aggressively the ECB can hike. President Lagarde said the ECB is "not here to close spreads". Markets now price only around 24bps of further tightening by December, meaning another hike is no longer fully priced by year-end. In our view, December remains a more credible date than October for the next move. 

France budget

The French government released further details of its 2027 budget, confirming a deficit target of 5.0% of GDP in 2027, from 5.4% this year and 5.1% last year. Meeting the target will require EUR43bn of new tightening measures; the EUR54bn figure cited two weeks ago included EUR11bn already approved by the National Assembly. Around 60% (EUR26bn) is expected to come from spending cuts and 40% (EUR17bn) from higher revenue. No broad increase in direct taxation is planned, and the surtax on large companies will be reduced to EUR5bn from EUR7.5bn. In our view, the growth assumptions (0.5% this year, 1.0% next year) are reasonable, but the scale of fiscal tightening looks ambitious given the political environment. The debt agency also announced a record EUR340bn borrowing program for 2027. Parliamentary debate begins on 13 October, and Moody's rating review is due on 23 October, where a downgrade to align with Fitch and S&P is seen as likely.

Japan

The September Tankan survey showed business conditions remain generally solid. The overall diffusion index improved, though slightly below consensus. Manufacturers reported stronger activity and outlook, particularly in production and electrical machinery, supported by AI-related demand, while non-manufacturers saw a modest deterioration in current conditions, likely reflecting elevated energy costs, though their outlook improved. There were tentative signs of easing price pressures, with the non-manufacturers' output prices DI softening and inflation expectations edging down 0.1pp, but labor shortages deepened, implying continued wage pressure. Tokyo CPI pointed the other way, with headline inflation at 2.7% (vs. 2.5% expected) and the core-core measure at 3.0%, its fastest in over a year. Overall, the data reinforces the case for further BoJ normalization, in line with our scenario of two hikes (December 2026 and March 2027), but do not add urgency for a move as early as October.

China

China's manufacturing sector gained momentum in September. The official manufacturing PMI rose to 50.1 from 49.8, returning to expansion after two months of contraction, while the official non-manufacturing PMI climbed to 50.2 from 49.0 (vs. 49.2 expected), lifting the composite to 50.7. The private RatingDog manufacturing PMI rose to 52.1 from 51.5 (vs. 51.7 expected), its strongest reading since April, and the services PMI improved to 51.6.

Australia

The Reserve Bank of Australia raised its cash rate target by 25bps to 4.60%, as expected, stating that inflation is still too high and that it is willing to tighten further if needed. August CPI rose 4.0% y-o-y (vs. 4.1% expected), up from 3.5% in July, while the trimmed mean held at 3.6%, suggesting underlying inflation remains sticky.

Highlights

On oil

Oil markets remained under pressure last week, with Brent trading around USD 105 while dated Brent (reflecting physical delivery) settled near USD 127, a significant premium that signals acute tightness in actual barrels. On the crude side, Persian Gulf flows partially recovered to 17.5 million barrels per day, or roughly 98% of pre-war levels, aided by Saudi Arabia restarting exports through its East-West pipeline on September 28 following the earlier drone strike disruption, with flows reaching approximately 3.5mbd, about half the pipeline’s full capacity. The recovery in crude flow has not, however, resolved the more acute problem in refined products: shipments of gasoline, diesel and jet fuel remain at only 50% of normal, as moving refined products through alternative routes is significantly more expensive than moving crude. US gasoline inventories fell to 204 million barrels, their lowest since November 2014, with Midwest stocks at all-time lows following a Chicago-area refinery outage.  On the diplomatic front, the deadlock persisted through the week: Iran refused to soften its conditions for reopening the Strait of Hormuz, while the US naval blockade left Iran loading zero crude onto tankers in September, down from approximately 250,000 barrels per day in August. The situation shifted materially on Friday, when emergency discussions between Trump, Macron and G7 leaders produced a coordinated agreement to release 100 million barrels of oil and refined products over four months, with diesel prioritized heavily in the first 20 days, supplied primarily by France and Germany. In exchange, the US lifted its threat of a diesel export ban to Europe, with G7 members committing to impose no mutual restrictions on energy products. The announcement triggered an immediate decline in diesel prices.     

On rates

Last week’s markets were dominated by a European contagion shock that produced genuinely historic spread moves. The Franco-German 10-year spread widened 32bps to 141bps, the biggest weekly widening in Bloomberg data going back to 1990, while the Italian spread over Bunds jumped 23bps to 114bps, the largest move since the initial Covid wave in April 2020. Paradoxically, the flight to safety drove German Bunds sharply lower in yield, with the 10-year falling 14bps to 3.46%, its biggest weekly decline since the Liberation Day tariff shock in April 2025. The contagion, combined with a softer-than-expected US jobs report, prompted a dramatic repricing of central bank expectations: the probability of a Fed hike in October collapsed from 70% to 30%, while ECB October hike pricing fell from 42% to 14%. Despite this dovish shift, the 10-year Treasury still managed to rise 11bps to 5.27%, its fifth consecutive weekly increase, as the underlying structural pressure on US rates persisted even as near-term hike expectations were revised down. Credit markets were not spared, with US HY spreads widening 39bps and EUR HY 37bps — moves that underscored the broader risk-off tone and the growing strain that elevated yields are placing on credit. In Japan, the BoJ’s Summary of Opinions from its September meeting revealed divided views on the pace of further tightening, with some members advocating acceleration if inflation overshoots while others cautioned against hasty action. The debate tempered immediate expectations for an October follow-up hike, and the 10-year JGB ended the week broadly unchanged at around 3.09%.

What to watch

• Monday: US ISM Services; Eurozone PPI, Multiple ECB speakers
• Tuesday: US Trade Balance; Germany Factory Orders; Eurozone Retail Sales; Fed's Williams speaks; BoJ's Ueda speaks
• Wednesday: FOMC Minutes; Sweden CPI; Germany Industrial Production; US 10-year Note auction
• Thursday: US Initial Jobless Claims, US 30-year Bond auction; BoE's Bailey speaks; ECB account of September meeting 
• Friday: US University of Michigan Survey; Canada Labor Force Survey; Norway CPI