How does Wall Street view the August non-farm payrolls? Strong employment doesn't end the suspense of a September rate hike; next week's CPI will be "decisive."

The unexpectedly strong US non-farm payrolls report in August has led the market to reassess the likelihood of a Fed rate hike in September, but Wall Street does not believe the policy outcome is decided. Many analysts believe that while the strong jobs data has given the Fed's hawkish camp more leverage, it is insufficient to determine the September rate decision alone. The real factor likely to "determine the direction" will be the CPI data released next week.

The U.S. Bureau of Labor Statistics reported on Friday that nonfarm payrolls increased by 162,000 in August, far exceeding market expectations of a 56,000 increase. The combined increase in the previous two months was revised upward by 55,000, with July's figure revised sharply from a decrease of 23,000 to an increase of 21,000. The labor force participation rate rose slightly to 61.6% in August, slightly higher than market expectations. The unemployment rate remained stable at 4.1% in July, and average hourly earnings rose 0.3% month-over-month and 3.1% year-over-year, both in line with market expectations.

Following the data release, market bets on a rate hike at the Federal Reserve's September 15-16 meeting intensified significantly, with the implied probability of a rate hike in federal funds futures rising from approximately 55% before the data release to around 59% to 60%. The yield on the 2-year Treasury bond, the most interest rate-sensitive instrument, rose by about 5 basis points to 4.38%, indicating that the bond market quickly re-priced in the risk of higher policy rates.

Strong non-farm payrolls data boosted the hawkish camp, but not enough to seal the deal.

BMO Capital Markets strategist Vail Hartman believes the report "supports the hawkish camp, but is not enough to provide a decisive basis for a rate hike on September 16."

She pointed out that although the market's implied probability of a September rate hike has increased, employment data will still be less important than inflation in policy decisions.

Olu Sonola, head of U.S. economics at Fitch Ratings, described the report as " undoubtedly strong ," believing it reaffirms the stability of the U.S. labor market.

But Sonola also emphasized that the real risk event is next week's CPI. " This is data that can really change the situation ."

Yelena Shulyatyeva, senior U.S. economist at the Conference Board, holds a similar view. She stated that many Federal Reserve officials are awaiting next week's data for evidence that inflation is continuing to decline toward the 2% target; if such progress does not materialize, " then I think they will raise interest rates ."

In other words, Wall Street's current assessment is not that "strong non-farm payrolls = the Fed will inevitably raise interest rates," but rather that non-farm payrolls have raised the threshold for interest rate hikes to a new level, and the CPI will ultimately determine whether this step will occur.

BlackRock's Rosenberg: Data confirms existing perceptions of the job market; the real pressure has returned to inflation.

Jeff Rosenberg, a portfolio manager at BlackRock, offered a more direct assessment in an interview with Bloomberg Television.

He believes that the much stronger-than-expected jobs report is actually just "a confirmation of our existing knowledge of the labor market and a refocus on inflation."

Rosenberg stated that if the CPI data released on September 11 continues to show progress in cooling inflation, " I think they will hold off ."

In his view, the role of this non-farm payrolls report was more about ruling out the possibility that "extremely weak employment data would prevent the Federal Reserve from raising interest rates." What will truly determine the policy direction in September is whether inflation will accelerate again, or whether the rate of decline will be "not fast enough."

Rosenberg also believes that the US is currently experiencing a typical " low hiring, low layoffs " job market. The inflationary pressures stemming from rapid wage increases after the pandemic have significantly weakened; the more pressing concern now is the transmission of energy prices to core inflation.

On that day, U.S. diesel prices hit a record high of $5.85 per gallon, making energy costs a significant factor in market concerns about a resurgence of inflation.

Moderate wage growth: Strong employment does not necessarily equate to rising inflationary pressures.

This is also a key reason why many analysts did not immediately switch to the view that "a rate hike in September is inevitable" simply because the non-farm payrolls data exceeded expectations.

Average hourly earnings rose 0.3% month-over-month and 3.1% year-over-year in August. Reuters, citing industry sources, pointed out that wage growth remains relatively moderate, meaning that the strength of the job market has not translated into significant wage inflation pressure.

Peter Cardillo, chief market economist at Spartan Capital Securities, believes the non-farm payroll report was "very strong" relative to market consensus, but wage data did not pose a new threat of inflation.

He pointed out that the average hourly wage rose by 3.1% year-on-year, basically continuing the recent level. " Wages are not a problem; in fact, this is a positive factor ."

If the CPI and PPI continue their previous cooling trend next week, he expects the Federal Reserve will likely keep interest rates unchanged.

Mark Spindel, chief investment officer at Potomac River Capital, also believes that the latest jobs report has recovered some of the weakness in the previous data, especially in areas such as public schools.

But even with such strong data, he still stated:

"Even with today's strong (employment) data, I don't think anyone will decide to tighten (monetary) policy based on this alone. Next week's inflation report will be more decisive."

The probability of an interest rate hike has risen to around 60%, and the bond market is the first to repric.

The financial markets’ first reaction after the employment data was released was quite clear: raising interest rates has become a more realistic scenario again.

Reuters reported that federal funds futures showed the market's probability of a rate hike at the Fed's September meeting had risen to about 59%, up from about 55% before the data release; another Reuters report showed that the market had once priced in this probability at about 62%.

The Wall Street Journal also reported that the strong jobs report pushed up U.S. Treasury yields across the board, with market bets on a September rate hike rising sharply from about 50% to about 61%. Yields on 2-year, 10-year, and 30-year U.S. Treasury bonds rose to about 4.41%, 4.80%, and 5.26% at one point, respectively.

However, this market reaction itself also illustrates that "the probability of an interest rate hike has risen to around 60%" and "an interest rate hike is a foregone conclusion" are still two different things.

The reason is that there is another set of key data next week that could reshape pricing – the August PPI will be released on Thursday, and the CPI on Friday.

Wall Street remains divided: some see reasons to raise rates, while others believe rates should remain unchanged.

Experts from various institutions have offered differing assessments of this matter.

Robert Pavlik, senior portfolio manager at Dakota Wealth, believes the U.S. economy has clearly not collapsed and the job market remains resilient. However, he argues that it would be unreasonable for the Federal Reserve to raise interest rates in September simply because of strong employment and persistently high inflation, as a single rate hike cannot address the inflationary issues stemming from energy prices or reduced oil supply.

Jamie Cox, managing partner at Harris Financial Group, took a more explicit stance of "holding rates steady." He believes that while the jobs report may have given Fed hawks a reason to raise rates, " the data supports holding rates steady, not raising them ."

Christopher Hodge, chief U.S. economist at Natixis, believes that strong employment data means the Federal Reserve needs to see clearer evidence of cooling inflation before it can remain on hold; if inflation data fails to provide such a signal, the likelihood of a September rate hike will increase further.

Sam Stovall, chief investment strategist at CFRA Research, also believes that the much larger-than-expected increase in non-farm payrolls has provided the Federal Reserve with "more ammunition to raise interest rates," or reduced the reasons for maintaining interest rates unchanged.

However, he also emphasized that the market now needs to wait for the next round of inflation data.

Behind the "strong employment" phenomenon lie structural problems: AI, education employment, and long-term unemployment deserve attention.

If we shift our focus from the total number of new jobs to the employment structure, the market does not see a comprehensive and robust employment report.

August's job gains were primarily driven by a rebound in employment in the leisure and hospitality industry and public education; meanwhile, employment declined in the information technology and financial sectors. The data also shows an increase in long-term unemployment, indicating that the "low hiring, low layoffs" environment is acceptable for those already employed, but not for the unemployed.

Brad Conger, Chief Investment Officer of Hirtle & Co., is particularly focused on the impact of AI on the employment structure.

He believes that if you look closely at the employment data, you can already " see the outline of AI replacing jobs ".

He pointed out that employment performance was weak in industries with high AI adoption rates, such as information and finance, while employment was stronger in industries related to data center construction, equipment, and power supply, such as construction, manufacturing, and utilities.

This means that simply observing the 162,000 new jobs created may not be enough to fully describe the changes taking place in the U.S. labor market.

Other sources cited by Reuters also pointed out that the weakness in the July employment data was somewhat of a "false alarm," partly due to seasonal adjustments in local government education and employment; meanwhile, the increase in long-term unemployment means that the "low hiring, low layoffs" state in the job market is not without its costs.

"Trade for strong non-farm payrolls first, then wait for CPI": The next hurdle for the stock and bond markets is clear.

Tim Urbanowicz, chief investment strategist for Innovator ETFs at Goldman Sachs Asset Management, believes the market may adopt a " react first, ask questions later " trading approach.

Following the release of the jobs report, the bond market initially prices in higher policy rates, but as investors further digest the data, the market will eventually return to the broader rebalancing trend in the job market and the issue of inflation.

Josh Stevens, chief investment officer at Cresalta Investment Management, also believes that this is a highly volatile report, but it at least makes one thing clear: the Federal Reserve will be paying more attention to inflation next.

Gary Schlossberg, global strategist at Wells Fargo Investment Institute, pointed out that strong employment data means that the case for a Fed rate hike is strengthening if inflation does not improve further.

His assessment can be summarized as follows: This non-farm payroll report has increased the importance of next week's CPI – the CPI must perform more "friendly" in order to offset the interest rate hike pressure brought about by strong employment.

At the same time, Rosenberg believes that even if the Federal Reserve eventually raises interest rates by 25 basis points, the stock and credit markets may not necessarily suffer a significant impact.

He stated that the current stock market is "more focused on the numerator than the denominator"—that is, corporate profits and profit growth, as well as the productivity and profitability improvements brought about by the AI technology wave. As long as credit quality remains good and credit spreads remain tight, a single 25 basis point rate hike may not be enough to change the overall logic of risky assets.

Therefore, Wall Street's true interpretation of the August non-farm payrolls data is not that "the Fed will definitely raise interest rates in September," but rather that the employment situation has once again provided enough leverage for the hawks. What will determine whether this leverage can be translated into actual policy action is inflation.

Market bets on a September rate hike have risen back to around 60%, but this probability is still far from being a certainty. Next week's PPI, and especially the CPI released on September 11th, will be the last round of key economic data before the Fed's September meeting.

As many institutional figures have repeatedly emphasized, the non-farm payrolls have brought the issue of interest rate hikes back to the table, while the CPI will likely determine whether the Federal Reserve will ultimately take action or remain on hold.

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