Stronger-than-expected US non-farm payrolls data has raised the probability of a September rate hike to around 60%, with the market closely watching next week's CPI.

U.S. nonfarm payroll data for August significantly exceeded expectations, further widening market divergence regarding the Federal Reserve's policy direction in September. Strong job growth indicates the continued resilience of the U.S. economy and has led to a renewed upward revision of market expectations for a Fed rate hike. U.S. stocks fell on Friday, U.S. Treasury yields generally rose, and gold came under pressure.

Data released by the U.S. Labor Department on Friday showed that nonfarm payrolls increased by 162,000 in August, roughly three times the number of jobs economists had expected. This stronger-than-expected employment performance suggests that the labor market has not experienced the significant deterioration previously feared, further complicating the Federal Reserve's policy trade-off between employment and inflation.

Federal funds futures markets indicate that the probability of a rate hike by the Federal Reserve at its September 16 meeting has risen to approximately 60%. This follows previous signals from Fed Governor Waller that he favored keeping interest rates unchanged, which had initially dampened market bets on a September rate hike.

The market reaction subsequently leaned towards a hawkish stance. All three major U.S. stock indexes closed lower on Friday, and U.S. Treasury yields generally rose. However, looking at the weekly charts, the S&P 500 and Nasdaq 100 indices still closed higher, indicating that the market correction triggered by the jobs data is currently relatively limited.

US Treasury yields rose across the board, while risk assets have not yet shown significant pressure.

Following the release of the employment data, U.S. Treasury bonds were sold off, and yields across all maturities generally rose.

Among them, the yield on the 2-year US Treasury note, which is most sensitive to monetary policy, rose 3.4 basis points to 4.3703%, reaching a high of 4.416% during the session, the highest since January 2025 ; the yield on the 10-year US Treasury note rose 2.2 basis points to 4.782%; and the yield on the 30-year US Treasury note rose slightly by 0.3 basis points to 5.246%.

However, the transmission of this round of bond market volatility to other risky assets remains limited. Credit spreads remain low, and the downside protection costs for risky assets are relatively limited. JPMorgan Chase points out that liquidity in the US Treasury market has deteriorated significantly, but stock index futures and corporate bond ETFs have not yet experienced similar pressure.

Collin Martin, Head of Fixed Income Research and Strategy at Charles Schwab, stated that current financial conditions remain loose, and credit spreads are still exceptionally narrow. Meanwhile, corporate profits have grown by over 20% year-on-year, and current corporate financing costs do not appear to be putting significant pressure on businesses.

This means that although employment data has boosted interest rate expectations, the impact of high interest rates on corporate financing and risky assets has not yet been fully realized.

AI investment boom provides support, leading to a divergence in employment structure.

The current resilience of the US economy is also related to the continued growth in investment in AI infrastructure.

Brad Conger, chief investment officer at Hirtle & Co., said the outline of the “AI substitution effect” can already be vaguely seen in the August employment data: the financial and information industries lost a total of 34,000 jobs, while industries related to data center construction, equipment supply and power supply, such as construction, manufacturing and utilities, performed more strongly in terms of employment.

In a client report, BNP Paribas economists stated that the jobs report indicates the US economy remains in a cyclical expansion phase, with loose monetary policy and the AI infrastructure boom providing significant support. Given the limited labor supply, the unemployment rate is likely to continue declining, and wages will face upward pressure.

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

Therefore, the current US economy is not facing a typical situation of "high interest rates suppressing demand." Although corporate financing costs have risen, credit activity and investment demand have maintained a certain level of growth. This is one of the reasons why risk assets did not experience a more drastic correction when faced with hawkish employment data.

With rising expectations of interest rate hikes, the CPI will become the next key indicator.

The non-farm payroll data was clearly hawkish, but it's not enough to definitively determine the Fed's next policy path. The market will now focus more on inflation data.

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

Sarah Hunt, chief market strategist at Alpine Saxon Woods, said the jobs data offered significantly less policy justification for dovish positions compared to a weaker jobs report.

Marvin Loh, senior macro strategist at State Street, pointed out that Friday's jobs report once again demonstrated that the U.S. economy is performing well even in the absence of structural conditions to suppress the unemployment rate. He believes the market is signaling to Warsh that "interest rates should be raised" and still expects the Fed to raise rates this year.

Greg Boutle, head of U.S. equity and derivatives strategy at BNP Paribas, said that with earnings season largely over, macroeconomic data will be a key variable influencing the market in the coming weeks. He believes that a more cautious approach to equities is appropriate now, but it's not yet time to be explicitly bearish.

In his view, while Friday's non-farm payroll data was slightly hawkish, it still didn't fully clarify the Fed's next policy direction. The most crucial variables going forward are next week's CPI data and whether the Fed will choose to raise interest rates before the US midterm elections.

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