The U.S. labor market weakened significantly in September, adding just 29,000 jobs and pushing the unemployment rate to 4.2%, a report from the Bureau of Labor Statistics released Friday shows. The figures fell well short of forecasts for 84,000 new positions and a 4.1% jobless rate, effectively removing the case for a Federal Reserve interest rate increase this month.

Markets reacted immediately to the soft data. Stock futures climbed while Treasury yields dropped, as traders priced in a higher likelihood that the central bank will keep borrowing costs unchanged. The CME Group's FedWatch tool placed the probability of a rate hold at the Oct. 27-28 meeting at 82.8%. "For the Fed, this number should be the nail in the coffin for an October hike," Thomas Simons, chief U.S. economist at Jefferies, wrote in a client note.

The September report followed substantial downward revisions to prior months. The Bureau of Labor Statistics cut August's job gain to 133,000 and flipped July from a gain to a loss of 10,000 positions, wiping out 60,000 jobs from the overall tally. Despite the headline miss, the household survey painted a different picture. Household employment jumped by 406,000, and the labor force expanded by 485,000, pushing the participation rate up 0.2 percentage points to 61.8%, its strongest reading since May.

Wage growth remained sluggish, adding to the mixed labor signal. Average hourly earnings rose just 0.1% last month, capping the 12-month increase at 3%, the slowest pace since May 2021. "Wage growth fell to a new 5-year low and is being wiped out entirely by inflation. That stings heading into the holidays," said Heather Long, chief economist at Navy Federal Credit Union. Policymakers continue to view inflation, which sits at a 3% annual rate on the Fed's preferred gauge, as a greater threat than labor market weakness.

Job creation was concentrated in specific sectors. Healthcare added 17,000 workers, construction brought on 11,000, and manufacturing hired 9,000. Conversely, government payrolls fell by 17,000, temporary help services declined by 11,000, information services lost 10,000 positions amid artificial intelligence concerns, and financial activities shed 7,000 jobs.

The labor market slowdown occurs against a backdrop of broader economic strength. The Commerce Department recently revised first-quarter gross domestic product growth to 2.5% and second-quarter growth to 2.2%. The Atlanta Fed currently tracks third-quarter expansion at 3.7%, indicating that the U.S. economy maintains steady momentum even as hiring slows.