The case for a Fed pause strengthens

Softer inflation and labor data strengthen the case for the Federal Reserve to pause further tightening, while higher bond yields improve fixed-income valuations and reshape equity leadership.

• U.S. nonfarm payrolls increased by only 29,000 in September, below expectations, while August core PCE inflation was 3% year over year and also below expectations.
• Fed Vice Chair Philip Jefferson said policymakers might need more time before further adjustments, and Governor Michelle Bowman saw no urgent need for additional action.
• The implied probability of an October rate hike fell to roughly 30% by Thursday.
• The U.S. 10-year Treasury yield reached its highest level since 2002 during the third quarter, pressured by resilient growth, sticky inflation, the prolonged Middle East conflict and competition for capital.
• The S&P 500 and MSCI All Country World Index were about 2% below their all-time highs, but the Russell 2000 had fallen roughly 9% since mid-August as bond yields rose.

Takeaway: Investors should expect a more patient Fed and find government bonds more attractive after the yield repricing, while looking beyond resilient headline equity indexes because higher rates are creating sharper differences across sectors, styles and company sizes.