September NFP Report Set to Test Interest Rate Hike Bets

The September non-farm payroll (NFP) report is set to be released on Friday and could have significant implications for interest rates. The Federal Reserve has already raised interest rates by 25 basis points to a range of 3.75% to 4.00%, and markets are pricing in a roughly 64-67% chance of another hike on October 28.

A hot print, with payroll growth above 130k and wages rising by 0.4% month-over-month, could reinforce the case for an additional interest rate increase. However, some analysts argue that August's strong payroll gain may have been due to favorable seasonal adjustments rather than underlying strength, which could lead to a 'payback' in September.

BofA and Deutsche Bank are forecasting a more subdued 60k payroll growth, but still see underlying job growth around 100k+, suggesting that a weak headline would not necessarily signal a recession. JPMorgan is expecting a more robust 100k payroll growth and 4.1% unemployment rate.

The market reaction to the NFP report will depend less on the actual payroll number and more on wages, unemployment, participation, and the 10-year Treasury yield. A strong report combined with firm inflation could strengthen the case for an October interest rate hike, while a weak report could lead to falling yields and potentially support an initial equity rally.