US Jobs Blowout Lifts December Rate-Hike Odds as Middle East Tensions and AI Selloff Rattle Markets
TREE NEWS reports: US nonfarm payrolls rose by 165,000 in October, far exceeding the 65,000 consensus and the upper bound of all forecasts, while the unemployment rate fell to 4.1% from 4.2%. Average hourly earnings climbed 0.4% month-on-month and 3.1% year-on-year, and the participation rate ticked up to 61.9%. Upward revisions added 84,000 jobs to the prior two months. The data jolted rate markets, pushing the implied probability of a 25-basis-point December hike above 80% from around 70%, and lifting two-year Treasury yields by as much as 7 basis points intraday.
The blowout report collided with a sharp risk-asset selloff earlier in the week, driven by a broad AI-related unwind. The Nasdaq fell more than 3% for the week despite a 1.1% rebound on Friday, the S&P 500 lost 2.7% — its worst weekly drop in 19 months — and the Dow slipped 0.9%. Chip stocks rebounded sharply on Friday, with AMD up over 10% and Micron up more than 5%, but the broader damage was evident in credit markets: SoftBank’s 2032 dollar bonds fell the most in ten weeks and Asian investment-grade spreads widened to their widest since July 2025.
Geopolitics Adds a Second Shock
Washington confirmed a small-scale strike on Iran, which reported two missiles hitting Qeshm Island, while a US MQ-9 drone was reportedly downed. Over the weekend, Houthi forces said Saudi airstrikes killed 22 in Yemen, and Saudi Arabia intercepted a Houthi missile as Riyadh’s financial district and an Aramco building were damaged. Yet de-escalation signals also emerged: Qatar said US-Iran talks had made major progress, and the US vice president has been deeply involved in indirect negotiations. Oil still fell more than 10% for the week — its worst in over six months — as traders weighed diplomatic progress against supply risk.
China Policy and Gold Buying
China’s State Council pledged to refine capital-market stabilization mechanisms and enhance the intrinsic stability of the stock market, while accelerating major projects and the construction of the “six networks.” The People’s Bank of China added 830,000 ounces of gold in October, its 24th straight month of purchases and a marked acceleration. Foreign-exchange reserves rose 0.14% on the month, though total official reserve assets slipped 0.13% as gold valuations declined. Chinese equities fell sharply, with the ChiNext down nearly 4%.
Market Implications
- Rates and the dollar: A December hike is now the base case, supporting the dollar — which posted its largest daily gain in over four months — and pressuring long-duration bonds. Ten-year yields ended near 4.86%, down 7 basis points on the week but up 3 basis points on Friday.
- Equities: The AI trade is undergoing a valuation reset. Microsoft’s decision not to renew an Oracle AI compute contract and reports of scaled-back OpenAI and Anthropic fundraising are forcing investors to reprice the capex cycle. Expect continued rotation away from crowded AI infrastructure names toward cash-generative defensives.
- Commodities: Gold’s weekly gain of nearly 5% despite Friday’s 0.9% dip reflects both central-bank demand and hedging against geopolitical tail risk. Oil’s collapse on diplomatic signals shows how quickly war premiums can unwind.
- Crypto: Risk-off conditions and higher real yields are a headwind, but the regulatory backdrop remains a swing factor. China’s crackdown on a Solana advertising campaign in Shanghai underscores that mainland crypto activity remains illegal.
Key Takeaways for Investors
First, the US labor market is not cooling fast enough to justify the rate-cut hopes that fueled 2025’s risk rally; position for a higher-for-longer curve. Second, the AI capex trade is no longer a one-way bet — scrutinize counterparty risk in compute contracts and the funding pipeline for model developers. Third, geopolitical headlines will keep oil and gold volatile; use options rather than directional bets. Fourth, China’s policy support for equities is real but incremental, and its gold accumulation signals a long-term reserve diversification away from dollar assets.
