Newsletter · 2026-10-02 · Ashutosh Agarwal

The Market Out-Hawks the Fed as Jobs Day Arrives - The Dollar Brief - Week of October 2, 2026

The Dollar Brief for the week of October 2, 2026 (podcasts published October 1 to 2): Minneapolis Fed President Neel Kashkari said the gap between the 2-year yield and the Fed's own forecasts is the widest on record, the 10-year hit 5.34% for its highest since 2002, David Rosenberg flagged the November 3 midterms and November 4 Treasury refunding as the bond market's key dates, a State Street strategist called 165 the top for dollar-yen, and emerging-market carry trades cracked ahead of the September jobs report.

The Dollar Brief

Week of October 2, 2026: The Market Out-Hawks the Fed as Jobs Day Arrives

The bond market and the Federal Reserve now disagree more than they ever have. That isn't us exaggerating. It's a Fed president's own math.

On Thursday Minneapolis Fed President Neel Kashkari told Bloomberg Talks that his staff worked out where the 2-year Treasury yield should be if the Fed did exactly what its own forecasts say. The answer was "a little above four." The real yield is "around 488 or 490." In his words: "This is the biggest gap between the actual two year yield and the implied two year yield."

Put simply, traders think the Fed will have to raise rates a lot more than the Fed thinks it will. CNBC's Mike Santoli did the arithmetic on Squawk on the Street: "It's basically exactly 100 basis points up," or about four more hikes.

That gap is the backdrop for this morning's jobs report. It also explains why the dollar has been firm without breaking out. US rates are doing the heavy lifting, and nobody wants to bet against them until the data says otherwise.

But the most interesting idea of the day had nothing to do with jobs. David Rosenberg told MacroVoices that the two dates that matter most for bonds are November 3 and November 4. The first is the midterm election. The second, which he says almost nobody is watching, is the Treasury's next borrowing announcement.

(Quick glossary. A "yield" is the interest rate on a bond; it rises when the bond's price falls. A "basis point" is one-hundredth of a percentage point, so 100 basis points is 1%. The "DXY," or dollar index, measures the dollar against six major currencies. "Real" rates are interest rates after subtracting expected inflation. The "neutral rate" is the interest rate that neither speeds up nor slows down the economy. A "refunding announcement" is the Treasury's quarterly plan for how much debt it will sell, and of which lengths.)

TL;DR

The widest market-Fed gap on record. Kashkari says the 2-year yield of about 4.88% to 4.90% is far above the "a little above four" implied by the Fed's own forecasts. His read: "when markets have a view, they're not shy about expressing those views" (Bloomberg Talks, Oct 1).
Yields hit new highs again. The 10-year touched 5.34%, the highest since 2002, after jumping "more than 85 basis points just in the third quarter" (Brew Markets, Oct 1). The 30-year was at 5.66% on Bloomberg Surveillance.
Rosenberg's two-date call. Midterms on November 3 likely bring gridlock, which he says leads to lower yields "80% of the time." The Treasury's refunding on November 4 could repeat Janet Yellen's 2023 move, when cutting long-bond sales sent the 10-year down about 100 basis points (MacroVoices, Oct 1).
The yen may be near its floor. A currency strategist on State Street's Street Signals called 165 "top of the range" for dollar-yen and sees "below 150 even by the end of this year" because, unlike in the past, Washington is backing Tokyo (Street Signals, Oct 1).
Emerging-market currencies are getting hit. Dollar-Mexican peso is up "almost 6%" in a few weeks, wiping out the peso's gains for the year, and dollar-Colombian peso is "almost 10% off the lows."
Fed independence, round two. President Trump again called on Jerome Powell to quit the Fed board, after the Fed's watchdog found no criminal wrongdoing in the headquarters renovation (Bloomberg Daybreak, Oct 1). Former Fed Vice Chair Alan Blinder would hold rates in October, partly because the Fed "wants to keep its head down very close to elections."
Bessent's buybacks are getting panned. Blinder said the Treasury Secretary "looked foolish with this half-hearted attempt" to bring down long-term yields. Rosenberg: "$6 billion into a market that turns over by a trillion dollars a day is not going to have a big impact."

What's new

The Fed's own official says the market sees a tougher Fed

Kashkari is a voting insider, so his comments carry more weight than anyone else's this week. He said the same things on Bloomberg Talks and on Bloomberg Surveillance TV. Here's what stood out:

On how high rates go: "We will do what we need to do to get inflation back down to our target... how high do rates have to go? I don't know the answer to that."
On AI and the neutral rate: Huge demand to borrow for AI investment "has to come from savings. Ultimately, that is a higher clearing price for that capital. And that means rates go higher." How long that lasts depends on whether AI pays off. "If AI proves to be as productive as people hope it will be, then this investment cycle could go on for a long time."
On who's right: He pointed out that after the 2008 crisis, the Fed kept forecasting rate hikes, and "the market said, no, you're wrong. It turns out the markets were more right than the Fed was."
On the term premium, the extra yield investors want for holding long bonds: part of it may be insurance against inflation. "Markets say, yes, we believe the Fed... But we want a little extra compensation just in case we're wrong." He called that "something that we need to pay attention to."
On treating oil as a one-off: His view "has evolved." "If it's five years of a sequence of one-time supply shocks, at the end of the day, it's the Fed's job to get inflation back down." He said he had AI tools read the Fed's 1970s meeting transcripts and found the arguments "not that different" from today's.
On life under Chair Warsh: "Remarkably consistent... everybody's very professional."

He also said shelved stock offerings are a sign policy is starting to bite: "to the extent that there are some tentativeness creeping into broad financial markets, that indicates, OK, this rate environment may be having some effect."

Yields: another 24-year high, and why

The numbers from Thursday's podcasts:

10-year: hit 5.34%, the highest since 2002, and has risen "more than 85 basis points just in the third quarter, one of the biggest quarterly increases in decades" (Brew Markets). Rob Black had it closing Wednesday at 5.27%, up from 3.95% a year ago (Rob Black Show).
30-year: "5.66%," according to Tom Keene on Bloomberg Surveillance.
2-year: around 4.87% to 4.91%. It slipped after the soft inflation data, even as long yields kept climbing.

It's not inflation fear. Several guests pointed to the same evidence. Duke's Cam Harvey said on Bloomberg Surveillance that the market's long-term inflation forecast "is about 2.36%" and "has not moved over the past year... even since the invasion or the bombing of Iran." Corporate bond spreads haven't moved either. His conclusion: "The reason that rates are going up is because of higher expected real economic growth. It's that simple." He also offered some perspective: today's 10-year yield "is about average if you look at a longer history. What was abnormal was when the rate was 1%."

Rosenberg put a number on it on MacroVoices: the rise in yields is "90% real rates and only 10% inflation expectations." He sees two drivers:

AI borrowing. "Three of the biggest of the four [hyperscalers] are now net free cash flow negative. So they're going to the bond market... So now you're having corporate credit demands bumping against government credit demands."
"Regime change at the Fed." "If Powell were still in charge, most of this... would not be happening." When Warsh took over in June, the 10-year was "barely around 4.4 and we're up about 90 basis points since." He called the debt argument overdone: the 10-year was below 4% in February with $39 trillion of debt. "Now we're at $40... because it's a zero, everybody's talking about it."

Rosenberg was sharp on Warsh. He criticized the new chair's focus on the share of prices rising faster than 3%: "A bag of peanuts to Kevin Warsh is equivalent to an automobile." And: "whenever Warsh opens his mouth, the 10-year yield goes up six or seven basis points."

Bond shorts are crowded. Rosenberg flagged "almost... a record level of net spec... short positions on the CBOT when it comes to the 10-year note," meaning speculators are heavily betting on lower bond prices through futures. "It is sexy and fashionable to hate the bond market right now." Crowded bets like that can reverse sharply if the story changes.

The midterms and November 4: the bond trade nobody's talking about

This was the most original argument of the day, and it matters for the dollar. If US yields fall hard, one of the dollar's main supports goes with them.

Rosenberg's case on MacroVoices:

Gridlock is coming. "It looks as though the Democrats take the House. There's now, in the prediction polls, more than 50% chance they take the Senate."
The stimulus ends. The One Big Beautiful Bill's tax breaks were "one offs... there's no more fiscal stimulus in the economy after November 3rd."
History favors bonds. When one-party control gives way to a split government, "80% of the time, the economy slows, 80% of the time, inflation goes down, and 80% of the time, bond yields go down" over the next two years. "I'll take those 80% odds."
Then the refunding. On November 4 the Treasury announces its borrowing plan. In November 2023, Yellen "dramatically cut the supply issuance of bonds and notes and flooded the market with bills," and the 10-year fell about 100 basis points by year-end. "We may well see a repeat of that... I think that's what he's going to do." In plain terms: Bessent could sell fewer long bonds and more short-term bills.

He also took a shot at the administration's mixed messages: "How can you go on to an affordability program ahead of the midterms, and then you want to engage in a trade war with your principal trading partner north of the border?" And on Bessent's "I'm the house" remark: "people are betting against the House."

A Wellington portfolio manager agrees. Brij Khurana, who runs fixed income at Wellington, said on Alpha Exchange: "If we do get divided government come November, that has historically been very important inflections for bond markets where the market's quick to price in less stimulus." November "could be an important catalyst."

The Fed-independence angle. A Washington policy analyst on Bloomberg Surveillance TV added that if Republicans lose the Senate, or even a few seats from their 53-47 majority, "it will be very difficult for this president to get anybody confirmed... who's at all controversial, particularly to the Fed." That's a quiet support for the Fed's independence, and for the dollar.

Dollar-yen: why this time could be different

The most detailed currency discussion of the day came on State Street's Street Signals. The guest, a currency strategist, wasn't named in the episode transcript. This is a bank practitioner talking, not a pundit, and he has a good record. Two years ago, the host said, he called 140 as support for dollar-yen, and the low came at 140.62.

His call now: "165 would be top of the range for me moving forward." If dollar-yen goes back above 160, "even overnight," expect "significant conversation and rhetoric from the Bank of Japan and the US." He sees "a move... below 150 even by the end of this year, and then naturally... back down towards 140."

Why he thinks it's different: For a decade, Japan's interventions faded and "market forces take dollar-yen higher." This time:

The US is involved. There were rate checks in January and "the joint intervention in July." "When you add the US and how forceful they've been on this, I think to me that makes me think that we're near the top."
The Bank of Japan is still raising rates.
The trigger: "If we do get any shift in rate expectations to the downside in the US... that can be the next... leg lower in dollar-yen."

But the yen story is a one-off. The broader dollar "has held a pretty strong range and it's near the high end of that range on the back of the move in US rates." The yen move "really hasn't fed through to a lot of the other currencies in the G10 space."

Why the dollar has firmed: He credited Warsh's rate hike with removing a worry. "We've removed the tail of the concern on the political pressure... that's also a reason for what you've seen in the dollar... this 2 or 3% move in the DXY." Plus oil: with Europe talking about "energy crisis," the dollar's role as a safe place to hide is back. "The US in the growth stocks, the tech names, is still really challenging to move away from."

Nik Bhatia put the September move at "from the 98 area up to almost the 102 area" on The Bitcoin Layer (Sep 30). (Crypto venue.) He blamed France: Europe "is not stepping in here to defend its currency, it might be stepping in to defend its bond market and letting its currency go."

His big caveat: We're "in the 7th or 8th inning" of the rise in rates. A ceasefire with Iran and a drop in oil could take pressure off. And he worried about what markets have priced: "a lot of central banks having 100 basis points in the curve over the next year, what does that do to the economy?"

Emerging markets: the carry trade cracks

The "carry trade" means borrowing in a low-interest currency, like the yen, to buy higher-yielding ones, like the Mexican peso. It worked well this year because markets were calm. That calm is ending. From the same Street Signals episode:

Colombia's peso "was up 17 or 18% year to date until... the past couple weeks." Dollar-Colombian peso is now "almost 10% off the lows."
Mexico's peso has given back all of its 2026 gains, with "an almost 6% move higher in dollar Mex."
The rate cushion is thin. The interest-rate gap between Mexico and the US is "only about 250 basis points now, which is near historical, if not historical lows." With US rates rising and stocks at highs, "is it worth the extra risk now?"

His summary: "It's all about volatility."

Khurana sees it differently on Alpha Exchange: "I think we're still early innings in the EM local bull market potentially, but investors are still not very heavily allocated to the space."

Japan and Bessent: what the Treasury is really after

Khurana gave the clearest explanation yet of why Bessent cares so much about the yen. His point: Japanese investors own US assets "largely unhedged," meaning they bear the currency risk. A weak yen has rewarded them. "They've won with stocks going up, and they've won by the yen depreciating." That has drained demand for Japan's own bonds and currency.

So "what Secretary Bessent is trying to do is to just make that not a one-way trade." A steadier yen might bring Japanese money home, which the administration argues would help lower yields.

He noted the catch: "If the Japanese are buying less US bonds, someone else has to buy those bonds. There is a little bit of cognitive dissonance there." He also said the money has mostly gone into US stocks, not bonds, so a yen-carry unwind "matters... more for stocks now than it does for bonds."

Fed independence: Powell, Warsh and the politics

Trump vs. Powell. On Bloomberg Daybreak, the president called the former chair "incompetent" over a renovation whose cost has risen to $2.4 billion. Bloomberg's Michael McKee said the inspector general "did not identify administrative misconduct." In McKee's words, nobody acted criminally, "they just did not manage this very well."

The partisan take. On Kudlow, Larry Kudlow said, "It is time for Powell to resign." Art Laffer called Warsh "probably the best Fed chairman we'll ever see... even as good as Paul Volcker." Kudlow tied it to the currency: "by shrinking the money supply or the less printing of money, the dollar is going up. That's a good thing." (Opinion show; Kudlow is a former Trump economic adviser.)

The former insider. Blinder, on Squawk on the Street, said Warsh's rate hike proved he's not a "sock puppet," which is "definitely a big positive." Warsh "seems to have some kind of ability to handle the president." Would Blinder hike in October? "I would hold." Core inflation shows "a slightly stronger case that it's trending down than trending up." And the October 28 meeting is "only days before the election." December "is probably good enough. But look, this is a close call."

Bessent's buybacks: "If you're in a hole, stop digging"

The Treasury raised its long-bond buyback limit "from two billion to as much as six billion," but actual purchases have been "much smaller than the maximum," Matt Diemer noted on Daily Crypto News, citing Reuters. (Crypto venue.) Bessent still calls it a liquidity tool, not a yield-control tool.

Critics on Thursday's podcasts were blunt:

Blinder: "He looked foolish with this half-hearted attempt to... buy down the yield curve... The market doesn't get it." He added that the Treasury's involvement in the yen "almost never" happens. "He seems to think it's a good idea to monkey around with the bond market. And the bond market doesn't think it's a good idea."
Rosenberg: $6 billion is tiny next to daily trading of a trillion dollars. The real lever is what the Treasury chooses to sell.
Mark Thornton of the Mises Institute, on The Julia La Roche Show, compared buying back long bonds with short-term borrowing to "using my credit card to make my mortgage payment." He thinks the Fed will keep raising rates "until the stock market breaks," then restart bond buying. (Austrian-school economist who favors gold and hard assets.)

The data: a hot prices number, strong hiring signals

From Thursday's Squawk on the Street:

ISM manufacturing: 54.5 against 55 expected. But the prices paid index came in at 77.9, against 73 expected, "the highest in maybe three or four months." Santoli: "It is a single mandate fed at this point," meaning only inflation matters to the Fed right now.
Jobless claims: 197,000, the lowest since July.
Challenger layoffs: 43,281 in September, down 20% from a year earlier and the fewest for any September since 2022.
Payrolls expectation: about 84,000 for today's report.

Trepp's analysts added on The TreppWire Podcast (Oct 2) that odds of an October move dropped "from 70% to 50%" after Williams' comments, and that ADP showed 90,000 private jobs added. Their read: "more of a timeout" than relief.

Citi's call. Citi's equity strategist Scott Cronert said the bank's economists think "we've got the September hike and they're probably in pause mode to middle of next year." His own view: "I can take one, probably two" more hikes, and after that "you begin to set up... for a year-end rally opportunity in U.S. equities."

The debate

Is the Fed about to overdo it, or is the market right to expect more?

The "market is right" side. Kashkari, a voter, gives the market credit: it was right after 2008, and the AI boom may genuinely have raised the neutral rate. He's also done with excusing oil as a one-off: "five years into this, at some point, you have to say, hey, it's the Fed's job." The ISM prices index at 77.9 backs him up. Laffer and Kudlow cheer a tighter Fed and a stronger dollar.

The "Fed is overdoing it" side. Blinder would hold. Citi's economists see a pause until mid-2027. Khurana warns that the two classic recession triggers are arriving together: "tight monetary policy and then commodity price shocks that temporarily cause real wages to go down." Real wages excluding government transfers are "growing at a negative level year over year, which is very rare outside of recession." He thinks the long-run outlook for yields, about 6.2% on his preferred measure, "looks almost 100 basis points too high." Rosenberg says energy costs are "akin to a tax increase" and won't stick as inflation unless wages follow. "Average hourly earnings will be the most important number."

Why it matters for the dollar. If the market is right, US rates stay high, and so does the dollar, especially against the euro and emerging markets. If the doves are right, and midterm gridlock plus a friendly refunding pull long yields down, the dollar loses its main support. The yen would likely be the first to benefit, given US backing for a stronger yen.

Is the bond sell-off about debt?

Mostly no, said a surprisingly wide group on Thursday: Harvey, Rosenberg, Khurana, Kashkari, Santoli and even Laffer. Each pointed to flat inflation expectations and stable credit spreads. Thornton is the main dissenter, blaming "$2 trillion of deficit spending, 6% of GDP." Note that he speaks from a gold-friendly, Austrian-school perspective.

The trades in play

Inflation-protected bonds. Khurana: "inflation-linked bonds are some of the most attractive assets in fixed income right now." Breakevens are "basically at 2.3% throughout the whole curve," and real yields are near their highest "except for when the asset class was first created in the 90s" (Alpha Exchange).
UK long bonds over US. Khurana is "a little bit more excited about the back end of the curve" in the UK, because the Bank of England's bond selling is easing and "even left-leaning administrations are very focused... [on] the bond market."
Dollar-yen lower. The Street Signals strategist sees 165 as the top, below 150 by year-end, and 140 over time (Street Signals).
Hide in short-term debt for now. Rosenberg: "Where are you going to hide? Well, you're going to hide at the front end of the curve, or you're going to go to the treasury bills." But he's watching November for a turn in longer bonds (MacroVoices).
Hard assets. Thornton favors "gold, commodities, energy" over stocks for the next decade (The Julia La Roche Show).

Read-throughs

France isn't Italy in 2011. Khurana said the French-German spread "makes sense that it is wider" than in 2011, since France has borrowed heavily while others cut debt. But "there are a lot more mechanisms in place for the ECB to buy French debt," so people "shouldn't also price in some of the tail risk scenarios." That limits how far the euro's France problem can push the dollar higher.
China's bond market looks like a debt hangover. Khurana noted China's 5-year yield is around 1.5%, lower than even safe-haven markets, which "reminds me very much of the US and Europe after the GFC... a balance sheet recession."
The squeezed consumer is showing up at McDonald's. Jeff Snider pointed out on Eurodollar University that McDonald's US sales rose only 0.8% last quarter, and it guided to "slightly negative" sales this quarter. Real disposable income was "flat, and when excluding transfers, it was negative." That supports Khurana's real-wage worry.
Mortgages hit 7.6%. CNBC's Power Lunch reported 30-year mortgage rates at a multi-year high. Kashkari said frustration over "7, 7.5% mortgages" is the one area where he hears complaints about rates.
Stocks and bonds are "the inverse" of each other again. Janus Henderson's Marc Pinto, on Bloomberg Daybreak, said stocks at 19 times earnings is the inverse of the 10-year yield. "We are there today."

What changed since Thursday's issue

The 10-year set a new high at 5.34%, the highest since 2002. The 30-year reached about 5.66% to 5.67%.
A Fed voter said the market-Fed gap is the widest on record, with the market about 100 basis points more hawkish than the Fed's forecasts.
ISM prices paid jumped to 77.9, while jobless claims fell to 197,000.
Trump renewed his call for Powell to resign from the Fed board.
The midterms entered the bond debate in a serious way, with Rosenberg and Khurana both flagging November as a turning point.
The yen story gained a clear target: 165 as the ceiling, below 150 by year-end, from a strategist with a good track record.
Emerging-market currencies sold off as the carry trade unwound.