INSTANT VIEW-Soft September jobs report sends markets higher

NEW YORK, Oct 2 (Reuters) - US job growth slowed more than expected in September, fueling a bounce in stocks and bonds and a further retreat in market expectations for a Federal Reserve rate increase this month.

Nonfarm payrolls increased by 29,000 jobs last month after a downwardly revised 133,000 rise in August, the Labor Department's closely watched employment report showed on Friday. Economists polled by Reuters had forecast payrolls advancing 90,000 after a previously reported 162,000 surge in August.

Volatility linked to seasonal adjustment factors, the model the government uses to strip out seasonal fluctuations from the data, probably accounted for both the meager payroll gains last month and the downward revision to August's count.

Payrolls have a tendency to underperform when the Labor Day holiday falls late in the month, as was the case this year, economists noted. There have been no signs of a broad increase in layoffs. First-time applications for unemployment benefits have been hovering at 57-year lows amid robust corporate profit growth and resilient domestic demand.

Economists, however, expected that growing headwinds from the US-Israel war with Iran, including high energy prices and strained supply chains, would start disrupting the labor market by the end of this year and into 2027.

The unemployment rate increased to a still-low 4.2% last month from 4.1% in August. The unemployment rate is being kept low as retirements and the Trump administration's immigration crackdown reduce labor supply.

REACTION:

STOCKS: Major U.S. indexes rose modestly after the report. Futures tracking the S&P 500 .SPX were up 0.9% and those tracking the Nasdaq composite .IXIC were up 1%.

BONDS: U.S. Treasury yields fell sharply on the news. The 2-year Treasury yield , most sensitive to the market's expectations of Fed rate action, fell 7 basis points to 4.716%. The 10-year Treasury yield fell 6 basis points to 5.176%. The 30-year yield was down 4 basis point to 5.569%. Rate-hike expectations for this month's meeting fell as low as 12%.

FOREX: The dollar index fell 0.2% to 101.79.

COMMODITIES: The gold price rose 1% to $4,219.

COMMENTS:

TODD SCHOENBERGER, CHIEF INVESTMENT OFFICER, CROSSCHECK MANAGEMENT, WASHINGTON, DC:

"The lower jobs print including the revision is, oddly enough, good news for stocks. With the bond market organically doing the job of the Fed recently, we needed to sacrifice a headline metric and this morning's report accomplished the goal. Average Hourly Earnings down a tick helps relieve the inflation headache, albeit only in the short-term. Stocks will celebrate this news today even though Main Street has a legitimate reason to be concerned about job growth."

BRIAN JACOBSEN, CHIEF ECONOMIC STRATEGIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN:

"This wasn’t a firecracker of a report; it was more like a dud.

"The labor market wasn’t as strong as we originally thought it was. July was revised back to a negative number, there was a decent bounce in August, but the bounce then fell flat with a mere +29,000 gain in September.

"The diffusion indexes dropped back below 50. Chair Warsh was concerned about the breadth of inflation, but now he’ll have to consider the lack of breadth in the labor market. This statement supports an October pause."