Jobs Report to Shape Fed's Rate Hike Decision
The upcoming US jobs report has significant implications for the Federal Reserve's September meeting. The market is currently divided, with a 50.4% probability of a 25 basis point interest rate hike to 3.75%-4.00%, and 49.6% chance of keeping rates unchanged at 3.50%-3.75%. This shift from earlier in the week's expectations, which had climbed into the mid-60% range, is largely due to Fed Governor Christopher Waller's suggestion that he could support leaving rates unchanged if incoming inflation data confirms easing price pressures.
The August jobs report is expected to show a gain of around 56,000 jobs, following a surprise decline of 23,000 in July. Economists predict the unemployment rate will remain at 4.1%, while annual average hourly earnings growth is forecast to slow to 3.0% from 3.2%. The headline payroll figure will be crucial, but markets are likely to pay particular attention to unemployment, wages, and revisions to previous months.
The recent data leading up to the NFP has sent a mixed message. Private employers added only 38,000 jobs in August, below expectations for 48,000, while manufacturing lost 17,000 jobs and professional and business services shed 16,000. The JOLTS report showed job openings edged up to 7.271 million but remained slightly below expectations, while hiring dropped by 278,000 to 5.054 million.
The inflation signals have been more hawkish than the labour data. The ISM services index climbed to 55.4 in August from 54.1, beating expectations of 54.2, while new orders jumped to 60.9, their highest level in three and a half years. More importantly for the Fed, the prices-paid index climbed to 72.6, its highest since August 2022.
A strong payroll report would strengthen the argument that the Fed has room to concentrate on inflation. If job creation materially exceeds expectations, unemployment remains at or below 4.1%, and wage growth surprises higher, markets could rebuild September hike expectations toward the 60%-plus territory seen earlier this week. However, a weak report would produce the opposite effect.