Why were US stocks unaffected despite rising interest rate expectations and a sell-off in US Treasuries amid a strong non-farm payrolls report?

Global bonds were sold off and expectations of a Fed rate hike were rising, but Wall Street risk assets did not see the usual panic sell-off – credit spreads continued to narrow and downside protection costs remained relatively low. This rare “decoupling” pattern is testing the market’s limits of resilience.

Friday's strong non-farm payroll data again battered U.S. Treasury bonds, prompting traders to further bet that the Federal Reserve will begin raising interest rates at its September 16 meeting.

Following the non-farm payroll data release, the US dollar strengthened, and the S&P 500 closed lower for the day but still held onto its weekly gains; the Nasdaq 100 also recorded a weekly increase. Currently, the pressure in the bond market has not yet spread to the broader risk asset sector.

JPMorgan research shows that liquidity in the Treasury market has deteriorated significantly, but stock index futures and corporate bond ETFs have not experienced similar pressure. Several strategists warn that if interest rates rise sharply, investors may be forced to more aggressively reduce their risk exposure, potentially leading to a more substantial deterioration in market sentiment.

Meanwhile, inflation data will be the next key variable – next week's CPI release may further determine the Fed's course of action.

Credit spreads remained calm, and risk assets demonstrated resilience.

Strong economic growth and corporate profits are the core pillars for risky assets to withstand shocks in the bond market.

Collin Martin, Head of Fixed Income Research and Strategy at Schwab Financial Research Center, stated: "Financial conditions remain accommodative, and credit spreads are at unusually narrow levels. With corporate earnings growing at over 20% year-over-year, they don't seem too concerned about current corporate borrowing costs."

JPMorgan Chase's research also reveals a divergence between the price of capital and its availability:

Despite rising borrowing costs, credit issuance and money creation have not contracted. Bank lending in the U.S. continues to grow, and net issuance by U.S. investment-grade companies also increased in August. Amid the AI-driven investment boom, leading companies remain profitable, financing channels have not narrowed significantly, and large-scale capital expenditure plans can continue.

However, Martin points out that CCC-rated bond spreads have widened, while BB- and B-rated bond spreads have narrowed. Real estate and small-cap stocks have lagged behind in this round of interest rate increases, while energy and financial stocks have relatively benefited.

A sharp increase in interest rates is a greater risk.

iCapital global investment strategist Dan Suzuki is looking at a more destructive scenario. "If interest rates rise sharply, investors will likely be forced to reduce risk more aggressively, at which point market sentiment could deteriorate more substantially," he said.

Marvin Loh, senior macro strategist at State Street Bank, extended the issue to a broader level. He believes that the current fierce competition for capital between governments and businesses, coupled with the economy's continued robustness despite a lack of structural support, is a phenomenon that warrants attention. Loh said:

"Friday's jobs report reaffirmed this economic picture—the economy is functioning well even without the structural conditions that typically suppress unemployment, and market signals are telling Warsh that interest rates should be raised, which we continue to believe will happen this year."

Non-farm payroll data leaned hawkish, so attention shifted to CPI.

The specific content of the jobs report provided further support for expectations of an interest rate hike. August job growth exceeded expectations, and data for the previous two months were also revised upwards, leaving little basis for claims of a cooling job market.

Sarah Hunt, chief market strategist at Alpine Saxon Woods, said the report provides far less "ammunition" for doves than a weak data point could offer, and the market focus has now shifted to inflation—if next week's CPI data is strong, the case for a rate hike will be further strengthened.

Looking at the employment structure, Brad Conger, chief investment officer of Hirtle & Co., vaguely sees the outline of the AI displacement effect in the data.

He pointed out that the financial and information industries combined lost approximately 34,000 jobs, while sectors related to data center construction, equipment supply, and energy security, such as construction, manufacturing, and utilities, performed better. "If you look closely, you might see the beginnings of AI replacement," he said.

With earnings season nearing its end, the importance of macroeconomic data will increase significantly in the coming weeks. Greg Boutle, Head of U.S. Equities and Derivatives Strategy at BNP Paribas, stated in an interview:

"Now is the time to take a relatively cautious stance on stocks, but it's not yet time to be bearish. Today's non-farm payroll data was slightly hawkish, but it doesn't really answer the question of the Fed's next move. Therefore, the real key lies in next week's CPI and whether the Fed will raise interest rates before the US midterm elections."

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