Strong US Jobs Report Lifts September Rate Hike Odds to About 60%; CPI in Focus

Author: Wall Street Insights

The US August nonfarm payrolls report significantly beat expectations, further intensifying market disagreement over the Federal Reserve's September policy direction. Strong job growth shows the US economy remains resilient, prompting markets to raise expectations for a Fed rate hike. US stocks fell on Friday, Treasury yields broadly rose, and gold came under pressure.

Data released by the US Labor Department on Friday showed nonfarm payrolls increased by 162,000 in August, roughly three times economists' expectations. The stronger-than-expected jobs performance indicates the labor market has not deteriorated as markedly as markets had feared, making the Fed's policy trade-off between employment and inflation more complex.

Federal funds futures markets show the probability of a rate hike at the Fed's September 16 meeting has risen to about 60%. Earlier, Fed Governor Waller had hinted at a preference to keep rates unchanged, causing market bets on a September hike to pull back temporarily.

The market reaction leaned hawkish. All three major US stock indexes closed lower on Friday, and Treasury yields broadly rose. However, on a weekly basis, the S&P 500 and Nasdaq 100 still posted gains, indicating that the market adjustment triggered by the jobs data remains relatively limited.

Treasury Yields Rise Across the Board, Risk Assets Show No Significant Pressure for Now

After the jobs data, Treasuries were sold off, with yields rising across maturities.

The policy-sensitive 2-year Treasury yield rose 3.4 basis points to 4.3703%, after touching 4.416% intraday, the highest since January 2025; the 10-year yield rose 2.2 basis points to 4.782%; the 30-year yield edged up 0.3 basis points to 5.246%.

However, the transmission of bond market volatility to other risk assets remains limited for now. Credit spreads remain relatively low, and the cost of downside protection for risk assets is also relatively limited. JPMorgan noted that Treasury market liquidity has deteriorated significantly, but stock index futures and corporate bond ETFs have not shown similar stress.

Colin Martin, head of fixed income research and strategy at Charles Schwab, said financial conditions remain loose and credit spreads are still at unusually narrow levels. At the same time, corporate earnings are growing more than 20% year over year, and current corporate financing costs do not appear to be causing significant stress for companies.

This means that although the jobs data has pushed up rate hike expectations, the impact of high interest rates on corporate financing and risk assets has not yet fully materialized.

AI Investment Boom Provides Support, Employment Structure Shows Divergence

The resilience of the US economy is also linked to the continued surge in AI infrastructure investment.

Brad Conger, chief investment officer at Hirtle & Co., said the August jobs data faintly reveals an "AI substitution effect": financial activities and the information sector together lost 34,000 jobs, while construction, manufacturing, and utilities related to data center construction, equipment supply, and power support showed relatively strong employment.

BNP Paribas economists said in a client note that the jobs report shows the US economy is still in a cyclical expansion phase, with loose policy and the AI infrastructure investment boom providing significant support. With labor supply constrained, the unemployment rate may continue to fall and wages face upward pressure.

At the same time, high financing costs have not yet significantly restrained credit expansion. JPMorgan found that despite rising borrowing costs, US loan and money creation have not contracted in tandem; bank lending is still growing, and net issuance of US investment-grade corporate bonds also increased in August.

Therefore, the US economy is not facing a typical "high rates suppressing demand" scenario. Although corporate financing costs have risen, credit activity and investment demand are still maintaining some growth, which is one reason risk assets did not undergo a sharper adjustment in response to the hawkish jobs data.

Rate Hike Expectations Heat Up, CPI Becomes the Next Key Test

The nonfarm payrolls data was clearly hawkish, but it is not enough to fully determine the Fed's next policy path. Markets are now turning more attention to inflation data.

Dan Suzuki, global investment strategist at iCapital, warned that if rates rise significantly further, it could force investors to reduce risk exposure more aggressively and further worsen market sentiment.

Sarah Hunt, chief market strategist at Alpine Saxon Woods, said that compared with a weaker jobs report, this data provides clearly limited policy justification for doves.

Marvin Loh, senior macro strategist at State Street, noted that Friday's jobs report again shows the US economy is performing well even without structural conditions for lowering the unemployment rate. He believes the market is sending Waller a signal that "rates should be raised" and still expects the Fed to hike rates this year.

Greg Boutle, head of US equity and derivatives strategy at BNP Paribas, said that with earnings season largely over, macro data will be an important variable affecting markets in the coming weeks. He believes a cautious stance on equities is appropriate for now, but it is not yet time to turn clearly bearish.

In his view, although Friday's nonfarm payrolls data was slightly hawkish, it still has not fully clarified the Fed's next policy direction. The next key variable is the CPI data due next week, and whether the Fed will choose to hike rates before the US midterm elections.