European Debt Markets Grapple with Widening Spreads Ahead of Key Economic Data

In focus today

• European bond spreads remain a central focus this week, with the French government yield spread over German bunds widening to its highest level since 2011 on Friday.
• Attention turns to the US, where the ISM Service index for September is due. Following a robust flash Service PMI, analysts will watch to see if the ISM index confirms this strong momentum.
• In the euro area, the Sentix investor confidence indicator for October will provide an initial read on sentiment. Traders will also receive final services and composite PMI releases, expected to align closely with the flash estimates, alongside scheduled remarks from ECB’s Schnabel.
• Sweden’s services PMI is also on the agenda. The index saw a broad-based increase in July, propelled by higher business volumes, while the price component declined toward more normal levels.
• Later in the week, key final services PMIs for Italy, Spain, France, Germany, and the UK will be released.
• Looking ahead, Wednesday features Swedish inflation data and the FOMC minutes, followed by the ECB minutes on Thursday. The week concludes with Norwegian inflation figures on Friday. With a relatively light data calendar, market focus is likely to remain on geopolitical developments and European debt markets.

Economic and market news

What happened overnight

In geopolitics, the US has withdrawn B-1 bombers stationed at the UK Fairford Airbase, following a suspected terrorist plot to target the air base. The base has so far been used by US forces to carry out strikes in Iran, after former PM Keir Starmer granted permission in March.

What happened over the weekend

In the US, the September jobs report came in notably softer than anticipated, adding a dovish tilt to the monetary policy outlook. Nonfarm payrolls increased by just 29,000, missing the consensus estimate of 90,000, while August figures were revised down to 133,000 from 162,000. The unemployment rate ticked up to 4.2%, exceeding expectations of 4.1%, and average hourly earnings grew by only 0.1% month-on-month against a projected 0.3%. Coupled with larger-than-expected downward revisions to PCE data and dovish commentary from key Federal Open Market Committee (FOMC) members, market expectations for an October rate hike have plummeted to under 20%, down from approximately 70% the previous Tuesday.

In the euro area, September headline inflation rose to 3.8% year-on-year, marginally beating consensus expectations of 3.7% and up from 3.2% in August. Core inflation climbed to 2.5% y/y, in line with forecasts. The upside surprise in the Harmonised Index of Consumer Prices (HICP) was primarily driven by energy and food inflation, while underlying price pressures remained relatively muted. While the headline increase bolsters the case for further European Central Bank (ECB) tightening, the moderate underlying inflation trend suggests a December rate hike is more probable than an October move.

Also in the euro area, the EuroCOIN indicator suggests continued solid growth momentum in the euro area, pointing to a quarterly GDP expansion of around 0.4% in the third quarter. Although not a perfect predictor, the indicator’s decent historical correlation adds to the positive growth signals observed in recent PMI, Ifo, and European Commission business surveys. These encouraging growth metrics are crucial to consider amidst the current risk-off sentiment in European fixed income markets.

In Norway, the seasonally adjusted NAV unemployment rate held steady at 2.0% in September, with August’s figure revised down to match. This keeps the labor market tight and below Norges Bank’s latest Monetary Policy Report estimate of 2.1%, supporting expectations of further interest rate hikes. However, more neutral details showed an increase of 450 in the gross number of unemployed individuals, while new vacancies remained broadly stable.

In commodities, Brent crude is trading around USD 101 per barrel this morning. This follows an agreement by G7 leaders to release 100 million barrels of crude and diesel over the next four months, pressured by US President Trump, which includes a frontloaded diesel release within the first 20 days. The International Energy Agency (IEA) announced on Friday that its members have released approximately 325 million barrels of oil from the 400 million barrels pledged in March. It remains unclear whether the G7 release is part of the remaining IEA commitment or an additional draw from reserves. Additionally, OPEC+ members agreed over the weekend to maintain their oil production targets unchanged for November.

In geopolitics, Yemen’s Saudi-backed government has launched a counter-offensive to reclaim Houthi-controlled areas following the group’s seizure of the Bab el-Mandeb Strait last month, a critical global shipping artery. The Houthis have also claimed attacks on Saudi Aramco facilities, though these reports remain unconfirmed. These escalating tensions heighten risks to ongoing oil supply, freight costs, and global energy prices.

Equities: Equities experienced a strong rally on Friday, driven primarily by the softer-than-expected US September jobs report. The S&P 500 gained 0.7%, the Nasdaq rose 1.2%, and the Stoxx 600 increased by 0.8%. Most sectors finished in positive territory, with cyclicals and yield-sensitive sectors—such as consumer discretionary, technology, and industrials—leading the gains.

Consequently, global equities closed only marginally lower last week, down 0.5% overall, despite the rapid surge in yields. Over the past two weeks—which coincided with the bulk of the increase in the US 10-year yield—equities actually gained 0.4%. This represents a remarkably resilient performance given the speed of the yield adjustment. A similar divergence is visible in market volatility; while bond volatility (the MOVE index) has spiked, equity volatility has remained exceptionally low, particularly at the index level.

Adding to this divergence, the typically yield-sensitive technology sector has been the top performer by a wide margin. Over the past week, tech added another 1.5%, while traditional safe havens like healthcare and banks sold off by 3%. Over the past month, the global semiconductor industry has surged by a full 10%. This decoupling is far from the textbook example of how equities and sector performances typically react to a sharp rates shock.

We explore this divergence between equity and bond market responses in greater detail in yesterday’s Editorial. In short, the isolation of volatility within the bond market makes complete sense to us, as the primary driver for equities remains earnings growth. We are currently in one of the strongest earnings cycles in modern history, meaning equities must be analyzed differently from other asset classes, as well as compared to their own historical behavior.

FI and FX: Turning to fixed income and foreign exchange, the softer-than-expected US labor report initially eased pressure on the Federal Reserve, but the positive impact on US government bonds was short-lived. The 10-year US Treasury yield ultimately closed 2 to 3 basis points higher than its opening level. A modest decline was observed in Asian trading this morning. The US dollar strengthened against both the euro and the yen, moving below the 1.12 level against the EUR and above 158 versus the JPY. Persistent focus on France continues to weigh on the euro, while Brent crude remains above the USD 100 mark.

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