Weekly Update 10/09/2026: US Service Sector Cools in September
- Alphabet unveils its next AI frontier model Gemini 4 Argon
- RTX wins $24.4 billion contract from US Navy
- BAE Systems wins contract from Lockheed Martin to deliver high-performance electronic warfare (EW) systems for F-35 Lightning II fighter jet
- McKesson and the private equity firm Clayton Dubilier & Rice will buy infusion provider Option Care Health Inc.
- Accenture and Dell Technologies announce AI partnership
Domestic Economic News
Last Friday all eyes were on the jobs report for the month of September. The U.S. economy created far fewer jobs than expected, pointing to a surprising soft spot in the labor market and broader economy. Nonfarm payrolls rose a seasonally adjusted 29,000 for the month while the unemployment rate increased to 4.2%, the Bureau of Labor Statistics reported Friday. Economists surveyed by Dow Jones had been looking for job growth of 84,000 and an unemployment rate of 4.1%. In addition to the weakness in September, the August jobs count was revised lower to reflect a gain of 133,000 while July switched from a gain to a loss as payrolls fell by 10,000. The revisions in total showed 60,000 fewer jobs than previously reported. Market reaction was swift to the report, with traders interpreting the soft jobs numbers as good news as they likely further cemented the Federal Reserve staying put at its October meeting. Stock futures rose sharply after the release while Treasury yields slumped after recently rising to levels not seen since the early part of the century. Market-implied odds that the Fed will hold rates steady at its Oct. 27-28 meeting jumped to 82.8%, according to the CME Group’s FedWatch tool.
Fed officials more closely watch the unemployment rate than the headline payrolls numbers. The household survey, which is used to calculate the jobless level, was considerably better than the establishment survey, which is used to derive the payrolls count. Household employment rose by 406,000 for the month, while the labor force swelled by 485,000 and the participation rate, which counts those working or actively searching for a job as a share of the total labor force, increased 0.2 percentage points to 61.8%, its highest since May. An alternative measure of unemployment, which includes discouraged workers and those holding part-time jobs for economic reasons, edged down to 7.6%, its lowest since January 2025. The report comes with Federal Reserve officials weighing the state of the economy and how it should affect their next interest rate move. Following statements in recent days from central bank policymakers, markets have recalibrated expectations and now expect the rate-setting Federal Open Market Committee to hold off until December for its next hike. The FOMC raised benchmark rates a quarter percentage point in September.
Policymakers largely see inflation as a larger threat to the economy than the labor market, which had shown resilience in recent months. The data has painted a picture of a low-hire, low-fire economy, with weekly jobless claims low and one indicator showing layoffs at their lowest rate in four years. Inflation, though, has held well above the Fed’s 2% target. The most recent indicator of the central bank’s preferred gauge showed core inflation at a 3% annual rate. Wages, though, continued to show signs of disinflation. Average hourly earnings increased just 0.1% in September, putting the 12-month gain at 3%, the lowest since May 2021. Wall Street had been looking for readings of 0.3% and 3.1%, respectively. The average work week was unchanged at 34.6 hours. Most of the monthly job gains came from healthcare, which added 17,000 workers. Construction was up by 11,000, and manufacturing added 9,000. Government employment fell by 17,000, while temporary help services saw a decline of 11,000, and information services lost 10,000 amid worries over the impact artificial intelligence may have on the jobs picture. Financial activities also saw a drop of 7,000 jobs. The weak job growth comes despite signs of strength elsewhere. On a macro level, economic growth has been strong. Additionally last week, the Commerce Department revised its count of both first- and second-quarter gross domestic product growth, to 2.5% and 2.2%, respectively. The Atlanta Fed is tracking third-quarter GDP at 3.7%.
The US service sector expanded at a slower pace in September as cost pressures grew by the most in more than four years. The Institute for Supply Management's services index fell 0.5 point to 54.9 last month, according to data released Monday. Readings above 50 indicate expansion. While resilient consumer spending, a stable job market and strong business investment continue to support demand for services, firms must also contend with mounting costs. ISM's measure of prices paid for materials and services rose to 74, the highest since July 2022. The measure had hit a nearly one-year low in February, just before the Iran war sent fuel costs higher. Supply chains have also been affected by tariffs and the Middle East conflict. A gauge of supplier delivery times was the highest since June. New orders, a measure of demand, slipped 1.1 point to 59.8. While down from August, the latest reading is still one of the highest of the past few years. ISM's gauge of order backlogs was the highest since July 2022. Service sector businesses have been cautious on hiring as they balance solid demand and rising costs. ISM's employment gauge ticked into positive territory, to 50.1, for the first time since June.
The US trade deficit widened sharply in August to the largest since early 2025 as a surge in inbound shipments of capital goods helped push imports to a record. The gap in goods and services trade grew 13.7% from the prior month to $105.6 billion, Commerce Department data showed Tuesday. Economists projected a $102.1 billion shortfall, based on the median estimate in a Bloomberg survey. The monthly trade figures, which are unadjusted for inflation, have been prone to wide swings since early 2025 because of US tariffs and more recently, war-driven volatility in crude oil prices. Supply-chain challenges and a reliance on imported technology to satisfy massive investment in artificial intelligence are also playing a role. The August deficit in goods and services trade will likely weigh on third-quarter gross domestic product. Before the latest figures, the Federal Reserve Bank of Atlanta’s GDPNow forecast indicated net exports will subtract 2.59 percentage points from the calculation of GDP. That would be the most since early 2025, ahead of the steep tariffs the Trump administration announced on “Liberation Day.” The value of imports of goods and services increased 4.3% and exports rose 1.4%. On an inflation-adjusted basis, the merchandise-trade deficit widened to $114.7 billion in August, also the largest shortfall since March 2025.
The value of imported capital goods — a category that includes computers and accessories, semiconductors and telecommunications equipment — rose $6.2 billion from a month earlier. The investment in the artificial-intelligence buildout has been a key driver of US economic growth. Imports of semiconductors jumped from the prior month by a record $2.4 billion. Inbound shipments of civilian aircraft and telecommunications equipment also picked up. The nominal value of imports of industrial supplies, which include oil and petroleum products, rose $9.1 billion from a month earlier. Outbound shipments of those supplies increased $6.3 billion. Imports and exports of nonmonetary gold, a category that has been particularly volatile since early last year, also picked up. Meanwhile, exports of services were little changed, restrained by the lowest level of spending by travelers to the US since August 2023. By country, the US merchandise-trade deficit with Canada widened to the largest since the start of 2025. Companies in both countries accelerated shipments to avoid tariffs after trade talks fell apart in August. US tariffs of 50% took effect on billions of dollars of Canadian goods on Aug. 22, prompting Canada to retaliate with new levies. The US goods trade deficit with Mexico and Vietnam widened slightly to fresh records, while the shortfall with Taiwan, a key supplier of semiconductors, also grew.
US mortgage rates climbed for a seventh straight week to their highest level in nearly three years, compounding the nation’s affordability problem. The contract rate on a 30-year fixed mortgage rose 19 basis points to 7.49% in the week ended Oct. 2, its highest point since November 2023, according to Mortgage Bankers Association figures released Wednesday. It’s up about half a percentage point over the past three weeks, marking the fastest increase since early 2023. Energy costs and overall inflation have climbed since the start of the Iran war, driving up yields for 10-year Treasury notes, which heavily influence mortgage rates and on Monday reached the highest level since 2002. Along with still-elevated prices, mortgage rates have prevented sales of previously owned homes and new-home sales from sustaining any momentum. The MBA purchase index, which measures loan applications, declined 2.1%, slipping to the lowest level in more than a year. MBA’s refinance gauge fell 7.5%, continuing a slide that started in mid-August. The MBA survey, which has been conducted weekly since 1990, uses responses from mortgage bankers, commercial banks and thrifts. The data cover more than 75% of all retail residential mortgage applications in the US.
Applications for US unemployment benefits fell slightly last week to the lowest level since July, showing layoffs remain limited across the job market. Initial claims eased 2,000 to 197,000 in the week ended Oct 3rd, according to Labor Department data released Thursday. It marked the fourth straight week that applications have been below 200,000. Initial claims remain near the lowest levels since the 1960s. Taken together with more moderate payrolls growth in September, the subdued number of filings points to a labor market in which employers are retaining workers while staying cautious about expanding headcount amid rising costs. The four-week moving average of new applications, a metric that helps smooth out volatility, fell to 198,000 last week, the lowest since September 2022. Before adjusting for seasonal factors, initial claims rose nearly 12,000 last week. The increase was led by California, Illinois and New York. Continuing claims, a proxy for the number of people receiving benefits, rose to 1.72 million in the previous week.
Interest Rate Insight and the Fed
Federal Reserve Bank of San Francisco President Mary Daly warned the economic shock from strong demand for artificial intelligence could be more pervasive and longer lasting than some expect. “It doesn’t seem like the demand for AI is going down. If anything, it seems like it’s going up,” Daly said in an interview with Axios conducted Monday and published Tuesday. “I see it less as a one-off,” Daly said about pressure on chip and other technology prices. She added that AI demand could spread, causing the shock to last longer than the typical one-to-three year time frame that the Fed expects for such events — and in which the central bank would normally “look through” the incident instead of reacting to it with policy adjustments. The San Francisco Fed chief, who doesn’t vote on monetary policy this year, said she supported the decision to raise interest rates at last month’s meeting. The rate hike was the first since 2023 and came amid increased concern among policymakers that inflation is no longer meaningfully cooling and that price pressures may be more broad based. In an August speech, Daly laid out two scenarios for the potential path of inflation. She told Axios this week that she still sees “some probability” that inflation shocks from tariffs, higher oil prices and AI will be temporary. Should the shocks last longer than Fed officials expect or if they start to compound each other, “that would extend the period of time over which those shocks would play out,” Daly said. Her view seems to be consistent with the other members of the FOMC.
Impactful International News
After decades of budget deficits and steadily rising debt, markets are putting a new price on French risk. Investors are charging much more to hold government bonds, the stock market is under pressure and the cost of insuring bank bonds against default has jumped. The euro fell to its weakest level since May 2025 on Monday, reflecting fears that upheaval will spill beyond France’s border. Immediate relief looks unlikely. Far-left and far-right politicians are vying to replace centrist Emmanuel Macron in an election that’s still more than six months away. The government is trying to pass a budget but faces stiff opposition from hostile lawmakers. High school students and public sector workers are protesting in the street, adding to the political upheaval. “Reality is catching up with us,” said Prime Minister Sebastien Lecornu, warning of the rapid increase in borrowing costs. Here are some of the ways that political and fiscal risk are showing up in markets:
Bonds
Once considered one of Europe’s safest bond markets, investors are demanding bigger payouts on government debt. France’s 10-year bonds are the worst performers of any Group of 10 economy this year, with yields on the benchmark rising almost 0.6 percentage points since the start of September to 4.75%. Measured another way: The difference between what France and Germany pay to borrow over a decade widened to 1.59 percentage points on Friday, the biggest premium since the euro zone debt crisis in 2012. While the gap has narrowed since then, investors remain on edge. Politics are at the root of the shift. Sentiment has soured because investors are looking ahead to the presidential election, according to Irina Kurochkina, portfolio manager at Aegon Asset Management. Far-right candidate Marine Le Pen and far-left hopeful Jean-Luc Mélenchon are top contenders. “With centrist parties losing ground, investors are not comfortable with the outcome of the extreme right versus left,” said Kurochkina. “There’s a risk they can’t make any decisions on the budget front and so you’re left asymmetrically exposed to bad outcomes.” Le Pen, who leads in the polls, has proposed radical policies in earlier campaigns, including pulling France from the euro. She’s now seeking to reassure investors, sketching out plans to slash the deficit by reducing transfers to the European Union and cutting outlays related to immigration. Yet there’s no easy fix. George Moran and Peter Schaffrik, strategists at RBC Capital Markets, said the swelling deficit can be traced to the decision in 2018 to reduce employers’ contributions to the social security system. “France cannot get out of this situation with a one-off painful budget,” they said on Monday.
Stocks
Companies in France’s CAC 40 stock market index make less than 20% of their revenues at home, but they’ve still been hit. The benchmark index has declined 3.9% this year through Monday, compared to a 7% gain for the pan-European Stoxx 600. The wider gap between yields on French and German government debt has reduced the appeal of financial industry stocks, with banks in particular trailing international peers. Domestically oriented sectors such as infrastructure-related firms and real estate have also sold off. Gilles Guibout, head of European equities at BNP Paribas AM, said he trimmed exposure over the summer to stocks that have high exposure to the French economy and heavily regulated companies that might be charged more tax. More than €2 billion ($2.2 billion) was erased from the value of French airport and highway operators last Tuesday after the government said it’s considering higher taxes on transport infrastructure, highlighting the risks. “We’ve adjusted our portfolio to take the incoming volatility into account and we’ll continue to do so accordingly,” Guibout said.
Credit
The price to insure French bank bonds against default has jumped above that of other European lenders. One example: The cost of insuring €10 million of Societe Generale SA debt against default for five years rose to €103,000 a year on Monday. That’s about €16,500 more than for comparable Deutsche Bank AG debt. As recently as late August, the two cost the same to insure. Credit default swap spreads are much higher for French lenders BNP Paribas SA and Credit Agricole SA than for major banks in the UK, Germany, Switzerland and Spain. “Higher rates, renewed fiscal concerns and mounting uncertainty have finally broken the recent calm in euro credit,” ING Bank strategists Jeroen van den Broek and Timothy Rahill said on Monday. They described the weakness as “most pronounced” in France.
Currencies
The euro’s slide reflects worries that France’s problems could spread beyond its borders. While investors have steered clear of direct comparisons to the euro zone crisis of 15 years ago, Barclays FX strategists including Themistoklis Fiotakis see downside risks for the single currency, even if France manages to pass a budget. “France’s fiscal problems are daunting enough in their own right, but are made even harder to fix by the upcoming presidential election and a hung Parliament where consensus building has often proved to be an impossible task,” they wrote on Sunday. Some investors see market turmoil extending into the post-Macron era.
In separate news, German factory orders fell the most since January, a stumble for the manufacturing sector as it tries to mount a sustained turnaround. Demand dropped 10.6% in August, following a 3.2% gain in July. Economists had predicted a decline of just 1%, according to the median forecast in a Bloomberg survey. The drop was predominantly because of a decline in major orders. Stripping out that component, the overall gauge fell just 0.1%. The overall measure, on a less volatile three-month basis, still showed a 1.3% gain. The outcome still casts a shadow over recent data that signaled resilience in Europe’s biggest economy to the inflation shock triggered by conflict in the Middle East. Optimism on that score prompted the country’s leading research institutes to more than double their forecast for this year to 1.3% expansion. Germany has particularly benefited from stronger exports and public spending on infrastructure and defense. Robust global demand and the artificial intelligence boom offset weak investment and consumption in the first half of the year, and indicators since then have pointed to continued momentum. Among the biggest risks for the outlook are the Iran war, with Germany vulnerable to higher energy costs if the conflict intensifies. Competition with China also remains fierce and the European Central Bank is set to raise interest rates further to contain inflation pressures. The Beijing challenge is particularly troubling for Germany. In a letter to European Commission President Ursula von der Leyen on Monday, Berlin and Paris jointly urged the European Union to adopt new powers enabling the bloc to cut off access to the single market to countries such as China. Separately, French industrial production unexpectedly fell in August as a retrenchment in electricity offset a small pickup in manufacturing. In Spain meanwhile, industrial output fell 0.7% from the previous month.
In a bit of positive news, German industrial production jumped the most since March last year, extending an economic recovery bolstered by public spending on infrastructure and defense. Output rose 2% in August, more than erasing a decline the previous month. Economists surveyed by Bloomberg had expected a 0.5% increase and none had predicted such a surge. The increase in production was driven by construction, although even the category that strips that out along with energy showed a meaningful gain. Capital goods output was particularly strong, while auto manufacturing retreated, the German statistics office said. The figures will provide reassurance in Europe’s largest economy as it strives to reinvigorate growth. The government is spending billions of euros on infrastructure and defense to bolster momentum, efforts that have both propelled and depressed factory orders in recent months. In August, demand slumped more than 10% after solid gains in June and July. The sharpest drop, some 62%, was recorded in transport equipment, a category that includes military vehicles, aircraft, trains and boats. That stumble is unlikely to derail Germany’s rebound. Manufacturers are looking at a record backlog of nine months worth of work, and economists expect growth to pick up from 1% this year to 1.2% in 2028. The country’s leading research institutes are even more optimistic and more than doubled their 2026 forecast to 1.3%. The increase in output in August defied the impact of reduced factory staffing during the summer vacation season, when car plants typically rein in production, and low Rhine water levels that impaired transport along a key shipping route for coal, fuel and industrial commodities. Robust demand for exports and spending on artificial intelligence offset weak investment and consumption in the six months through June, and business surveys since then have pointed to continued momentum. The Iran war and high energy costs remain risks that could weigh on growth.
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Company Events
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