During the Mid-Autumn and National Day holidays, falling oil prices, fading expectations for a Federal Reserve rate hike, and upbeat tech earnings lifted risk appetite in overseas markets, while European fiscal risk catalyzed an acceleration in global long-term bond yields, leaving European and U.S. equities mixed and commodities broadly lower.

Although nonfarm payrolls came in weaker than expected, the revised near-term U.S. growth figures and downgraded inflation data released by the BEA both eased rate-hike expectations for the year and lifted U.S. growth expectations, which is one reason long-end Treasury yields rose while U.S. equities staged a strong rebound. Based on the latest revised U.S. economic data, we expect the Fed to skip a hike in October while becoming more optimistic about the medium-term U.S. growth outlook.

Major asset classes

During the Mid-Autumn and National Day holidays (September 25 to October 6), global major asset classes put in a mixed performance. In equities, accelerating gains in global long-term bond yields at one point weighed on stock markets, after which tech shares drove a rebound in U.S. and Japanese-Korean equities, while European stocks extended their decline. In bonds and currencies, U.S. growth expectations, European fiscal risk, and sticky inflation drove a broad rise in global long-end government bond yields, with the euro falling and the dollar strengthening. In commodities, expectations of improving crude supply pushed oil lower, with Brent crude plunging 5.65%, while precious metals gold and silver tumbled as global long-term bond yields soared.

Overall, global major asset class performance was driven by four main themes: first, Middle East diplomatic mediation and improving crude supply conditions pushed oil prices down; second, downward revisions to U.S. PCE inflation, weaker nonfarm payrolls, and dovish comments from Fed officials drove rate-hike expectations for the year lower; third, U.S. growth expectations, French fiscal risk, and inflation concerns pushed global long-end bond yields persistently higher, weighing on precious metals and non-U.S. equities; fourth, positive news on AI-related applications, orders, and earnings lifted risk appetite, with tech shares driving a rebound in U.S. and Japanese-Korean equities in the latter half of the holiday period.

Overseas economies

U.S. economic data released around the holiday period was broadly solid. Although nonfarm payrolls came in weaker than expected, the BEA's annual revisions showed upward revisions to near-term U.S. growth data and downward revisions to inflation data, which both eased rate-hike expectations for the year and lifted U.S. growth expectations.

First, the BEA's annual revisions to U.S. national accounts showed the economy is more resilient and inflation pressure has eased somewhat. On growth, U.S. GDP for the first and second quarters was revised up by 0.4 percentage points and 0.7 percentage points respectively on an annualized quarter-on-quarter basis, while "core GDP" PDFP was revised up by 0.1 percentage points and 0.4 percentage points respectively to 3.3% and 4.2% on an annualized quarter-on-quarter basis, and real disposable personal income over the past five years was revised up across the board, indicating that the economy's underlying growth momentum remains strong. On inflation, the revised data showed a significant downward revision to the year-on-year path of PCE and core PCE since 2026, and after the release, market expectations for an October rate hike fell notably.

Second, September nonfarm payrolls: the 29,000 increase in U.S. nonfarm payrolls for September released on October 2 fell far short of the expected 90,000, the unemployment rate unexpectedly rose to 4.2%, and hourly earnings fell more than expected. After the release, the trade on cooling rate-hike expectations was very brief, partly because recent U.S. growth data has remained strong, especially the stronger growth figures after the BEA revisions, making the market more cautious about betting on fading rate-hike expectations.

U.S. Treasury yields and European and U.S. equities

During the holiday period, global long-term bond yields rose broadly. In terms of causes, the U.S. Treasury term spread widened again over the past two weeks, mainly due to fading Fed rate-hike expectations and a rise in the term premium brought by U.S. growth expectations. In contrast, a rise in the term premium from fiscal risk was the dominant driver of higher long-term government bond yields in Europe, and this difference is also the macro factor behind the stronger dollar and U.S. equities outperforming European stocks.

Beyond macro factors, of course, a recovery in risk appetite for AI-related trades driven by AI applications, orders, and earnings was the fundamental catalyst for this round of U.S. equity gains. As tech shares once again led the U.S. equity rebound while high rates continued to weigh on other sectors, U.S. equity market concentration intensified again, reflected in the S&P 500 market-cap-weighted index hitting a new high relative to the equal-weighted index.

Risk warnings: uncertainty over the U.S.-Iran situation; risks of Trump policies exceeding expectations; risks of Fed policy exceeding expectations. (Analysts: Lu Zhe, Zhang Jiawei, Wei Yi, Wang Zhuo)

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