U.S. nonfarm payrolls for August surprised sharply to the upside, widening the split in market views over the Federal Reserve’s September policy decision. Stronger job growth pointed to continued resilience in the U.S. economy and led traders to raise expectations for another rate increase. U.S. stocks fell on Friday, Treasury yields rose broadly, and gold came under pressure.
Data released by the U.S. Department of Labor on Friday showed 162,000 jobs were added in August, about three times economists’ expectations. The stronger-than-expected result suggested the labor market has not deteriorated in the way some investors had feared, while making the Fed’s balancing act between employment and inflation more difficult.
Fed funds futures showed the probability of a rate hike at the Sept. 16 meeting rising to about 60%. Earlier, remarks from Fed Governor Christopher Waller that were read as favoring no change in rates had briefly cooled market pricing for a September move.
The market response turned more hawkish. All three major U.S. stock indexes closed lower on Friday, while Treasury yields climbed across maturities. On a weekly basis, however, the S&P 500 and the Nasdaq 100 still posted gains, a sign that the adjustment tied to the payroll report remains limited for now.
Treasury yields climbed across the curve, but pressure on risk assets stayed contained
After the jobs data, U.S. Treasuries were sold off and yields moved higher across the curve.
The policy-sensitive 2-year Treasury yield rose 3.4 basis points to 4.3703%, after touching an intraday high of 4.416%, its highest level since January 2025. The 10-year Treasury yield gained 2.2 basis points to 4.782%, while the 30-year yield edged up 0.3 basis points to 5.246%.
Even so, the bond-market move has not fully spilled over into other risk assets. Credit spreads remain at relatively low levels, and the cost of downside protection in risk assets is still limited. JPMorgan said liquidity in the U.S. Treasury market has worsened noticeably, but similar stress has not appeared in equity index futures or corporate bond ETFs.
Collin Martin, director of fixed income research and strategy at Charles Schwab, said financial conditions remain loose and credit spreads are still unusually tight. At the same time, corporate earnings are up more than 20% year over year, and current corporate funding costs do not appear to be creating obvious strain.
That leaves the market in a position where rate expectations have moved higher, but the effect of elevated rates on corporate financing and risk assets has yet to fully show up.
AI investment remains a support as the job mix shifts
The resilience now visible in the U.S. economy has also been linked to continued investment in AI infrastructure.
Brad Conger, chief investment officer at Hirtle & Co., said August employment data already showed the outline of an "AI substitution effect." Financial activities and the information sector together lost 34,000 jobs, while employment was stronger in construction, manufacturing, and utilities, sectors tied to data center building, equipment supply, and power support.
Economists at BNP Paribas said in a client note that the report shows the U.S. economy remains in a cyclical expansion phase, with loose policy settings and the AI infrastructure buildout providing important support. With labor supply constrained, the unemployment rate could keep falling and wages may face upward pressure.
At the same time, higher financing costs have not clearly restrained credit expansion. JPMorgan found that although borrowing costs have risen, U.S. loan volumes and money creation have not contracted in tandem. Bank lending is still growing, and net issuance of U.S. investment-grade corporate bonds increased in August.
In that reading, the U.S. is not facing a typical case of high interest rates suppressing demand. Corporate funding costs are higher, but credit activity and investment demand are still growing to some extent. That is one reason risk assets did not see a sharper adjustment after the hawkish payroll surprise.
With rate-hike expectations rising, next week’s CPI becomes the key test
The payroll report was clearly hawkish, but not enough on its own to settle the Fed’s next move. The market is now set to focus more closely on inflation data.
Dan Suzuki, global investment strategist at iCapital, warned that if rates rise much further, investors may be forced to cut risk exposure more aggressively, which could worsen market sentiment.
Sarah Hunt, chief market strategist at Alpine Saxon Woods, said this payroll report offers much less policy support for doves than a weaker labor report would have.
Marvin Loh, senior macro strategist at State Street, said Friday’s report again showed that the U.S. economy is still performing well even without structural conditions that would push unemployment lower. He said the market is sending a signal to Waller that rates should be raised and that he still expects the Fed to hike this year.
Greg Boutle, head of U.S. equity and derivatives strategy at BNP Paribas, said macro data will become a major market driver in the coming weeks as earnings season is largely over. He said a more cautious stance on equities makes sense at this stage, though it is not yet time to turn outright bearish.
In his view, Friday’s payrolls number leaned hawkish but still did not fully clarify the Fed’s next policy step. The most important variable now is next week’s CPI release, along with whether the Fed will choose to raise rates before the U.S. midterm elections.