Labor market faltered in September as jobs increased by just 29,000, unemployment rate rose to 4.2%

The U.S. economy created far fewer jobs than expected in September, pointing to a surprising soft spot in the labor market and broader economy.

Nonfarm payrolls rose a seasonally adjusted 29,000 for the month while the unemployment rate increased to 4.2%, the Bureau of Labor Statistics reported Friday. Economists surveyed by Dow Jones had been looking for job growth of 84,000 and an unemployment rate of 4.1%.

In addition to the weakness in September, the August jobs count was revised lower to reflect a gain of 133,000 while July switched from a gain to a loss as payrolls fell by 10,000. The revisions in total showed 60,000 fewer jobs than previously reported.

Market reaction was swift to the report, with traders interpreting the soft jobs numbers as good news as they likely further cemented the Federal Reserve staying put at its October meeting.

Stock futures rose sharply after the release while Treasury yields slumped after recently rising to levels not seen since the early part of the century. Market-implied odds that the Fed will hold rates steady at its Oct. 27-28 meeting jumped to 82.8%, according to the CME Group's FedWatch tool.

"For the Fed, this number should be the nail in the coffin for an October hike," Thomas Simons, chief U.S. economist at Jefferies, said in a note.

"The payroll data surged in August, and we had expected the momentum to continue this month, given the historically low prints on jobless claims in recent weeks," he added. "However, it now appears that the August number was nothing more than a rebound from very weak hiring in June and July."

Fed officials more closely watch the unemployment rate than the headline payrolls numbers.