Payroll Report Beats Expectations, Rate-Hike Odds Rise
The latest US payroll report beat expectations by a wide margin, adding 162,000 jobs and pushing the rate-hike odds toward 60%. The increase in employment was accompanied by a slowdown in wages, with average hourly earnings rising to a cycle-low 3.1% year-over-year. This combination of strong hiring and restrained wage growth has complicated the most hawkish interpretation of the data.
The market's reaction to the report was muted, with equities barely moving and the PHLX Semiconductor Index (.SOX.US) surging over 3%. This increase in the semiconductor sector suggests that investors are starting to move beyond the debate about rate cuts and instead focusing on clarity. The upcoming CPI report will either confirm or reopen the debate.
The Federal Reserve's September meeting is now a crucial event, with CME FedWatch pricing currently at 58% for a hike. Friday's CPI print will be the final evidence before the vote. A hot CPI print above 0.25% would likely lift hike odds significantly, making put protection and defined-risk spreads on small caps relevant.