US Jobs Report Sets Stage for September Fed Meeting

The US employment report has become a crucial test for markets ahead of the Federal Reserve's September meeting, which is now almost an even bet on whether interest rates will rise or remain unchanged.

Futures currently assign a 50.4% probability that the Fed raises interest rates by 25 basis points to 3.75%-4.00%, leaving markets evenly divided between another increase and keeping the policy rate at 3.50%-3.75%. This is a significant shift from earlier in the week, when rate-hike expectations had climbed into the mid-60% range.

Economists expect the US economy to have added around 56,000 jobs in August, following a surprise decline of 23,000 in July, with the unemployment rate expected to remain unchanged at 4.1%, and annual average hourly earnings growth forecast to slow to 3.0% from 3.2%. The headline payroll figure will matter, but markets are likely to pay particular attention to unemployment, wages, and revisions to previous months.

A strong payroll report could strengthen the argument that the Fed has room to concentrate on inflation, while a weak report would produce the opposite effect, making it more difficult for policymakers to justify tightening monetary policy. The most complicated outcome may be a payroll number near the 56,000 consensus, which would probably leave the September decision close to its current 50-50 pricing.

Meanwhile, recent data has sent a mixed message, with private employers adding 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 told a similar story, with job openings edging up to 7.271 million but remaining slightly below expectations, while hiring dropped by 278,000 to 5.054 million.

The inflation and growth signals have been considerably more hawkish, with the ISM services index climbing 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.

The Fed's dilemma is that employment growth is weakening, but demand remains firm and inflation pressures have not disappeared. Payrolls may determine which side of 50% the September hike probability moves to on Friday, while the inflation data that follows could decide whether that move lasts.