To The Moon

Wall Street faced renewed pressure on Friday as a blockbuster August jobs report dramatically altered expectations for Federal Reserve policy, propelling the probability of a September rate increase to roughly 60% and triggering a synchronized repricing across stocks and bonds.

The Labor Department revealed that nonfarm payrolls surged by 162,000 jobs last month, nearly triple the level economists had forecast. This surprisingly robust employment growth signals that the labor market remains resilient, contradicting earlier fears of a sharp deterioration and injecting fresh complexity into the Fed's delicate balancing act between supporting jobs and containing inflation.

Traders quickly responded, with federal funds futures now pricing in about a 60% chance of a rate hike at the Fed's September 16 meeting. This marks a notable shift from recent days, when comments from Governor Waller hinting at patience had dampened bets on immediate tightening.

Stocks Slide While Treasury Yields Climb Across the Curve

The hawkish repricing hit equities immediately, as all three major US indexes closed firmly lower on Friday. Bond markets saw a corresponding sell-off, pushing yields broadly higher. Despite the daily losses, both the S&P 500 and the Nasdaq 100 managed to finish the week in positive territory, suggesting that the market's adjustment to this data, while swift, remains relatively contained for now.

The 2-year Treasury yield, which is highly sensitive to near-term policy expectations, jumped 3.4 basis points to 4.3703%, reaching an intraday peak of 4.416%—its highest level since January 2025. The 10-year yield added 2.2 basis points to close at 4.782%, while the 30-year bond yield saw a more modest gain of 0.3 basis points to settle at 5.246%.

However, the stress in government bonds has yet to spill over significantly into other risk assets. Credit spreads remain unusually tight, and the cost of downside protection has stayed relatively subdued. JPMorgan strategists noted that while liquidity in the Treasury market has deteriorated noticeably, equity index futures and corporate bond ETFs have not exhibited similar strain.

Collin Martin, fixed income research and strategy director at Charles Schwab, points out that financial conditions are still loose, with credit spreads at exceptionally narrow levels. He adds that corporate earnings are growing more than 20% year-over-year, and current financing costs do not yet appear to be creating significant pressure for businesses.

This suggests that while Friday's jobs report has pushed rate expectations higher, the full impact of elevated borrowing costs on corporate financing and risk assets has yet to materialize.

AI Investment Boom Underpins Resilience Amid Divergent Employment Trends

The surprising strength of the US economy is increasingly linked to the ongoing surge in artificial intelligence infrastructure spending.

Brad Conger, chief investment officer at Hirtle & Co., observes that the "AI displacement effect" is beginning to appear in the August payroll data. The financial activities and information sectors collectively shed 34,000 positions, while industries tied to data center construction, equipment supply, and power infrastructure—such as construction, manufacturing, and utilities—showed comparatively stronger employment gains.

Economists at BNP Paribas highlighted in a client note that the employment report confirms the economy remains in a cyclical expansion phase, buoyed by accommodative policy and the AI infrastructure buildout. With labor supply constrained, they expect the unemployment rate could continue to decline, keeping upward pressure on wages.

Notably, high funding costs have not yet meaningfully restrained credit growth. JPMorgan found that despite rising borrowing costs, loan volumes and money creation have not contracted in tandem. Bank lending is still expanding, and net issuance of US investment-grade corporate bonds increased in August, indicating that credit activity remains robust.

Consequently, the US economy is not currently facing the classic scenario of high rates suppressing demand. Though financing costs have escalated, both credit activity and investment demand are holding up, which helps explain why risk assets have avoided a sharper sell-off in response to the hawkish jobs figure.

CPI Data Next in Focus as Rate Hike Expectations Intensify

While the payrolls report carries a clearly hawkish tone, it has not fully resolved the path for the Fed's next move. Attention now shifts to inflation data as the next critical catalyst.

Dan Suzuki, global investment strategist at iCapital, cautions that a further significant rise in interest rates could force investors to more aggressively reduce risk exposure and lead to a deterioration in market sentiment.

Sarah Hunt, chief market strategist at Alpine Saxon Woods, argues that this jobs report offers the doves at the Fed far less ammunition to justify holding rates steady than a weaker employment figure would have.

Marvin Loh, senior macro strategist at State Street, views Friday's report as further evidence that the economy is running healthily even without the structural conditions needed to push unemployment meaningfully lower. He believes the market is signaling that the Fed should raise rates, and he still expects the central bank to deliver a hike before the end of the year.

Greg Boutle, managing director of US equity and derivatives strategy at BNP Paribas, notes that with the earnings season largely wrapped up, macroeconomic data will become the dominant market driver in the coming weeks. He advocates a more cautious stance on stocks, but does not believe it is yet time to turn outright bearish. In his view, while Friday's jobs number skews hawkish, it has not definitively clarified the Fed's next steps. The most significant variable now is the upcoming CPI release, along with the central bank's decision on whether to move before the US midterm elections.