Fed Rate Hike Odds Rise as US Jobs Data Surprises

The latest US nonfarm payrolls report has strengthened the case for a September interest rate hike by the Federal Reserve. The economy added 162,000 jobs in August, far exceeding the 56,000 expected by economists. This is particularly notable given that July's initial job loss of 23,000 was revised to a gain of 21,000. Unemployment remained steady at 4.1% as the labour force expanded by 683,000 people and the participation rate edged up from 61.4% to 61.6%. While the services sector reinforced this message with an ISM services index rise from 54.1 to 55.4 in August, input prices climbed from 70.3 to 72.6, suggesting persistent inflation pressure.

Market expectations initially pushed the probability of a September Fed increase to around 65%, but have since settled back to about 58%. This leaves investors divided just over a week before the 15-16 September meeting, with the upcoming inflation data taking centre stage. The release of producer prices on Thursday and CPI on Friday will be crucial in determining whether policymakers can afford to wait or if a quarter-point increase is necessary.