Author: Wall Street Journal

The U.S. non-farm employment data for August significantly exceeded expectations, further widening the market's divergence on the Federal Reserve's policy direction in September. Strong job growth indicates that the U.S. economy remains resilient and has led the market to revise upward its expectations for Fed rate hikes. U.S. stocks fell on Friday, U.S. Treasury yields generally rose, and gold came under pressure.

Data released by the U.S. Department of Labor on Friday showed that non-farm payrolls increased by 162,000 in August, about three times what economists had expected. The stronger-than-expected employment performance indicates that the labor market has not experienced the significant deterioration that the market had previously feared, complicating the Fed's policy trade-off between employment and inflation.

The federal funds futures market shows that the probability of the Fed raising interest rates at the September 16 meeting has risen to about 60%. Previously, Fed Governor Waller had signaled a preference to keep rates unchanged, causing market betting on a September rate hike to pull back temporarily.

The market response has since leaned toward a hawkish stance. All three major U.S. stock indices closed lower on Friday, while U.S. Treasury yields moved higher. However, from a weekly perspective, the S&P 500 Index and the Nasdaq 100 Index still achieved gains, indicating that the market adjustment triggered by this employment data is currently still relatively limited.

U.S. Treasury Yields Rise Across the Board, Risk Assets Show No Significant Pressure

After the employment data was released, U.S. Treasury bonds were sold off, and yields across all maturities rose.

Among them, the 2-year U.S. Treasury yield, which is most sensitive to monetary policy, rose by 3.4 basis points to 4.3703%, reaching a high of 4.416% during the day, the highest since January 2025; the 10-year Treasury yield increased by 2.2 basis points to 4.782%; and the 30-year Treasury yield edged up by 0.3 basis points to 5.246%.

However, the current round of bond market volatility has had limited transmission to other risk assets. Credit spreads remain at a low level, and the down-side protection costs for risk assets are also relatively limited. JPMorgan noted that liquidity in the U.S. Treasury market has significantly deteriorated, but equity index futures and corporate bond ETFs have not shown similar pressure.

Collin Martin, head of fixed income research and strategy at Charles Schwab, stated that current financial conditions remain accommodative, and credit spreads are still at unusually narrow levels. Meanwhile, corporate earnings have seen an annual growth of over 20%, and current corporate financing costs do not seem to be exerting significant pressure on companies.

This suggests that, although employment data has raised rate expectations, the impact of high rates on corporate financing and risk assets has not yet fully manifested.

AI Investment Boom Provides Support, Employment Structure Shows Divergence

The current resilience of the U.S. economy is also related to the continuously warming investment in AI infrastructure.

Brad Conger, Chief Investment Officer of Hirtle & Co., stated that the contours of the "AI substitution effect" can already be vaguely seen from the August employment data: financial activities and the information sector combined lost 34,000 jobs, while sectors related to data center construction, equipment supply, and power support, such as construction, manufacturing, and utilities, showed stronger employment performance.

BNP Paribas economists stated in a client report that this employment report indicates that the U.S. economy is still in a cyclical expansion phase, with accommodating policies and the AI infrastructure boom serving as important support. With labor supply constrained, the unemployment rate may continue to decline, and wages also face upward pressure.

Meanwhile, high financing costs have not significantly suppressed credit expansion. JPMorgan has found that, despite rising borrowing costs, the size of U.S. loans and money creation has not contracted in sync, bank lending continues to grow, and the net issuance of U.S. investment-grade corporate bonds also increased in August.

Therefore, the current U.S. economy does not face a typical "high interest rates suppressing demand" situation. Although corporate financing costs have risen, credit activity and investment demand are still maintaining a certain level of growth, which is one of the reasons why risk assets have not undergone more severe adjustments in response to the hawkish employment data.

Rate Hike Expectations Increase, CPI Will Become the Next Key Verification

The non-farm data is clearly hawkish, but it is still not enough to fully determine the Fed's next policy path. The market will turn more attention to inflation data next.

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

Sarah Hunt, Chief Market Strategist at Alpine Saxon Woods, stated that compared to a weaker employment report, this employment data provides markedly limited policy justification for the doves.

Marvin Loh, Senior Macro Strategist at State Street, pointed out that Friday's employment report once again demonstrated that even in the absence of structural conditions to lower the unemployment rate, the U.S. economy is still performing well. He believes the market is signaling to officials "that rates should rise" and still expects the Fed to raise rates within this year.

Greg Boutle, head of U.S. equity and derivatives strategy at BNP Paribas, stated that with the earnings season effectively over, macro data will become an important variable affecting the market in the coming weeks. He believes that it is currently appropriate to maintain a more cautious attitude towards stocks, but it is not yet time to clearly turn bearish.

In his view, although Friday's non-farm data was slightly hawkish, it has still not fully clarified the Fed's next policy direction. The next key variable is the CPI data to be released next week, and whether the Fed will choose to raise rates before the U.S. midterm elections.

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