US Payrolls Surge Boosts Fed Hike Odds to 16 Basis Points

The US August payrolls report showed an increase of 162,000 new positions, with the unemployment rate holding steady at 4.1%. The prior two months' numbers were also revised up by 55,000. This data shift has led to a higher probability of a Federal Reserve interest rate hike in September.

Market pricing for a 25-basis-point move now stands at 16 basis points, from 12.5 basis points the previous day, following comments from Governor Waller. The next key input for the Fed's decision will be the upcoming US inflation release, with forecasts pointing to a 0.4% month-on-month rise in headline CPI and a 0.2% increase in core prices excluding food and energy.

Chair Kevin Warsh has characterized the economy as being at full employment. With the crucial Consumer Price Index (CPI) release scheduled for next Friday, traders are advised to adjust their portfolios and consider defensive positions such as shorting September Secured Overnight Financing Rate futures or buying put options on Fed Funds futures.

The US Dollar Index is expected to gain further momentum as treasury yields rise, with the 2-year yield tracking closely to shifting Fed expectations. Buying near-term out-of-the-money USD call options against the Euro or Japanese Yen could exploit potential volatility.