Soft US employment data. The G7’s planned release of strategic oil reserves initially weighed on energy prices. But crude oil rebounded after Saudi Arabia's offensive against the Iranian-backed Houthis in Yemen emerged

A soft US employment report on Friday night reinforced market expectations for the Fed to hold off tightening again in October, but the impact on Treasury yields was fleeting, ending the session net higher for the session. The release of oil and diesel from strategic reserves supported lower energy prices, before a report suggesting Saudi Arabia is planning to attack the Iranian-backed Houthis resulted in crude oil prices recovering. Net currency moves were modest, with the NZD managing to recover a little Friday night after falling to new 2026 lows during the local trading session.

Oil prices had a rollercoaster ride on Friday, falling in anticipation of a pending announcement on the release of strategic reserves. That announcement duly came, with the G7 and its partners agreeing to release as much as 100m barrels of emergency oil and diesel stocks over the next four months. The move drove down oil, European and US diesel futures and reduced the likelihood of President Trump issuing a ban of US diesel exports.

However, the shift down in Brent crude to a low of USD98.40 per barrel wasn’t sustained, and adding to the price recovery, Reuters reported Saudi Arabia is planning an offensive against Iran-backed Houthi militants in Yemen, with options being considered including a coastal push to secure the Red Sea shipping route or an assault on multiple fronts. The operation was reported as expected to be launched in the coming weeks.  Overnight it appears the military action has already begun, led by Yemeni forces on the ground, which are overseen by Saudi Arabia. Brent crude closed the week above USD102 per barrel, ending the session little changed.

US labour market data were weaker than expected across all the key indicators.  Non-farm payrolls rose just 29k in September, with net -60k of revisions over the previous two months. The unemployment rate ticked higher to 4.2%, while average hourly earnings rose just 0.1% m/m, driving the annual increase down to a fresh five-year low of 3.0%.

The softer data gave the market more confidence that the Fed would likely hold rates steady at its next meeting late-October, with pricing slipping to less than 6bps. This is well down from the 16bps priced a week earlier, with much of the drop in pricing following the comments earlier in the week from NY Fed President Williams and Vice-Chair Jefferson, suggesting no need for urgency or more time to make a judgement on higher rates.

US Treasury yields fell after the employment report but the move soon unravelled, and the recovery in oil prices added to upside pressure.  The 10-year rate traded as a low of 5.16% before ending the day at 5.27%, up 3bps for the day and a couple of basis points higher from the NZ close.

It was also a choppy session for European bond markets. German 10-year bunds traded a 10bps range and closed down 5bps at 3.46%. There was a wild ride in French bonds, with the French-German 10-year spread exploding further, reaching a peak of 159bps, before stops were triggered and the spread closed the week at 141bps. Speculating on the French bond market has been a play thing for hedge funds this week, following the report earlier in the week of a wider projected fiscal deficit and record borrowing plans for next year, with next year’s Presidential election adding another element of angst for investors.

Annual euro area CPI inflation jumped from 3.2% to 3.8% in September, a three-year high, driven by higher energy costs. The core figure ticked up to 2.5% y/y. The data solidified market expectations that the ECB would likely hike again this year, most likely at the December rather than the October meeting.

In Japan, Tokyo CPI data were much stronger than expected, with annual inflation jumping from 1.9% to 2,7% y/y and the core measure which excludes fresh food and energy jumping from 2.0% to 3.0%. While base effects from administered prices dropping out of the annual calculation was responsible for a good deal of the jump in inflation, the data was still stronger than expected excluding this impact, putting the heat on the BoJ to tighter policy further. The market still sees only a small chance of a back-to-back hike at the October meeting, with a hike well priced for the following meeting in December.

In the equity market, US equities responded to the bad news of soft employment as something to embrace to the extent that it relieved pressure on the Fed to tighten policy. But higher Treasury yields meant a fading of earlier gains and the S&P500 closed up “only” 0.7%. The Euro Stoxx 600 index gained 0.75%, recovering some of its loss of the previous three sessions.

Net currency moves Friday night were modest, although the USD was slightly weaker for the day overall. The NZD traded a fresh low for the year of 0.5586 Friday afternoon, before buyers stepped in and it closed the week around 0.5615. The AUD recovered Friday night to close the week around 0.6955, seeing NZD/AUD a little softer at 0.8070. Movements in other NZD crosses were also modest. The NZ TWI traded at a fresh 15-year low of 63.8 and closed the week below 64, capping off a sixth successive week of declines.

Domestic rates largely followed the decline in Australian rates on Friday. NZGBs were marked down 4-5bps across the curve. The 2-year swap rate closed down 6bps at 4.02% and the 10-year rate fell 5bps to 4.77%. The moves simply reversed much of the price action on Thursday. Australian yields rose a touch in the Friday overnight trading session, setting the scene for an uneventful market open today.

The economic calendar this week is very light. The key US release is the ISM Services survey released tonight.  The domestic focus will be on tomorrow’s QSBO.

Jason Wong is the senior Strategist at BNZ Markets.