The U.S. non-farm payrolls will be revealed tonight: From "savior" to "background"? The Federal Reserve's rate hike focus has shifted to the CPI.

With the recent surge in long-term government bond yields globally and Waller's significant elevation of interest rate hike expectations for the Federal Reserve in his latest speech in Jackson Hole, the importance of the August U.S. non-farm payroll data, to be released on Friday evening Beijing time, lies in assessing whether the labor market is weak enough to effectively impose a veto on interest rate hikes. However, the pricing of the latest policy path has already undergone significant revision. On September 3, Fed Governor Waller stated that if inflation continues to cool in August, he prefers to keep interest rates unchanged in September; only a resurgence in inflation would prompt a consideration of rate hikes. His remarks caused the probability of a rate hike in September to swiftly drop from about 65% to nearly 50%, leading to a rise in U.S. stock prices and a decline in bond yields. If the new non-farm payrolls come close to market expectations of 53,000 to 56,000 jobs added and the unemployment rate remains at 4.1%, even if hiring is weak, it would only extend the stable pattern of low hiring, low layoffs, allowing the Fed to remain focused on inflation; if employment experiences negative growth again and the unemployment rate rises to 4.2% or higher, the market may significantly reduce rate hike pricing. Conversely, strong non-farm numbers can demonstrate that the economy can withstand rate increases, but cannot alone force the Fed to act, as the inflation trend is the ultimate policy anchor emphasized by both Waller and Waller. The recent U.S. employment reports do not depict a recessionary collapse, but rather a summer characterized by near stagnant hiring and controlled layoffs: there was a net loss of 3,000 jobs in June and July combined, with only 53,000 new jobs expected in August. Yet, the number of initial unemployment claims remains at 206,000, and the number of layoffs announced by businesses this year has decreased by 41% year-over-year. Geopolitical conflicts, energy prices, tariffs, and uncertainties related to AI replacement are suppressing corporate hiring, while a contraction in labor supply has lowered the threshold for necessary new job creation to maintain stable unemployment. This indicates that low growth in non-farm payrolls no longer automatically equates to an economic recession and is insufficient to prevent the Fed from raising rates again due to inflation. Hiring is nearly at a standstill, while layoffs remain under control: U.S. employment is in a low mobility summer. The August U.S. non-farm payroll report, set to be released on Friday, is expected to mark the final touch on a summer of relatively stagnant job growth. According to consensus expectations from a Dow Jones survey, if predictions hold true, data from the U.S. Bureau of Labor Statistics will show that non-farm payrolls have only increased by 53,000 jobs. Even such weak growth is expected to be sufficient to maintain the unemployment rate at 4.1%. However, from a broader perspective, this report will follow data from June and July, during which a total of 3,000 jobs were lost. Moreover, for the past four consecutive years, the initial value of August non-farm payrolls has been revised downward. Overall, this data indicates that the labor market is neither booming nor collapsing; for Federal Reserve officials who are planning the next monetary policy actions, employment is increasingly taking a back seat. Dan North, a senior economist at Allianz Trade for the North American market, stated that the current state of the employment market is stable but unremarkable. I dont see much truly strong growth, which is understandable because if you are an employer, you are facing a war that could be long-lasting, along with fluctuating energy prices, tariffs, and the government changing everything almost overnight, he added, thus there is a lot of external uncertainty. In fact, the high energy costs pressure brought by geopolitical uncertainties and the disruptive effects of AI technology on traditional labor are the two dominant themes in the U.S. labor market; at the same time, the contraction in labor market size is also helping to keep the unemployment rate stable. Despite various pressures, U.S. companies have still avoided widespread layoffs. The number of weekly unemployment claims remains controlled; data from outplacement consulting firm Challenger, Gray & Christmas indicates that the overall layoff rate in 2026 is the slowest in four years. Employment is taking a backseat in policy-making: Inflation controls the Fed's next direction. In recent days, Fed officials have stated that their concerns for the labor market are significantly smaller compared to those for inflation. Earlier this week, Fed Governor Michael Barr described the employment situation as stable, while another Fed Governor, Christopher Waller, remarked that the employment landscape is in a satisfactory statewhich may not be an exuberant affirmation, but if inflation does not further ease, the state of the labor market is enough for the Fed to consider hiking interest rates without disturbing the job market. Andrew Hollenhorst, a senior economist at Citigroup, noted in a report: The monthly non-farm payroll data has weakened in recent months, but the lower number of initial unemployment claims and stable unemployment rate make Fed officials unconcerned about the labor market. Citigroup expects only 20,000 new jobs to be added in August, with July potentially revised down to a reduction of 23,000 jobs; the unemployment rate may slightly rise to 4.2%. However, Hollenhorst anticipates that the Fed will still view these figures as stable rather than a cause for broader concern. Nevertheless, Citigroup believes that the Feds next move will be rate cuts. Wallers remarks on inflation have prompted some interest rate futures traders to more confidently bet that the Fed is likely to maintain interest rates at the upcoming meeting in less than two weeks. Aside from the usual seasonal factors, the August report will also be influenced by several other factors. In July, the U.S. government ended the temporary protected status for thousands of Haitians, which could reduce employment. This action is expected to impact 350,000 Haitians. At the same time, one of Americas asset management giants, Vanguard, stated that its proprietary data based on 401(k) accounts indicates that only about 8,000 new jobs are likely to be added in August, partly due to a significant decline in hiring among the 21 to 24 age group. Bank of America report: Non-farm is just a precursor; CPI holds the policy trigger. Waller at Jackson Hole clearly re-centered policy focus on inflation: he believes the unemployment rate remaining at 4.1% and initial jobless claims near decades-low levels indicate that the overall labor market is consistent with a state of full employment; in contrast, the overall personal consumption expenditure price index rose 3.7% year-over-year, with a six-month annualized increase of 4.1%, both significantly above the 2% target. Therefore, the Fed's current primary focus should be on prices. Waller's framework of employment being sufficiently stable, inflation still too high once raised the probability of a rate hike in September to approximately 65%-70%, causing the yield on the U.S. 10-year Treasury to rise to about 4.80%; the yield on Japan's 10-year Treasury surpassed 3%, and the long-term bond yields of Germany and the UK also climbed to their highest levels in over a decade, and in some cases, several decades. However, the latest pricing of policy has already undergone significant revision. Fed Governor Waller stated yesterday that if inflation continues to cool in August, he prefers to keep rates unchanged in September; only if inflation rises again will he consider a rate hike. Thus, there is currently no consensus among the Fed for a rate hike, but Waller has set a hawkish threshold, leaving the final decision to the CPI report on September 11. Economists at Bank of America anticipate only 40,000 new jobs in non-farm payrolls in August, with 35,000 added in the private sector, and the unemployment rate remaining at 4.1%, significantly below the market consensus expectation of around 53,000. However, given the near cessation of labor supply growth, seasonal biases in summer, and the continuous downward revisions to Augusts initial values over the years, low new job additions do not necessarily indicate an outright collapse in total demand. What Bank of America is truly focused on is the unemployment rate and labor participation rate: if the participation rate rebounds and pushes the unemployment rate to 4.2%, employment data might significantly alter the policy risk balance; if the unemployment rate continues to stay at 4.1%, the Fed is likely to interpret it as close to full employment. Bank of America believes that the impact of non-farm data on the bond market shows a clear asymmetry: if the unemployment rate rises to 4.2%, it may push the 2-year Treasury yield down by 5-12 basis points and the 10-year yield down by 5-10 basis points; if the unemployment rate falls to 4.0%, both could rise by 5-6 basis points and 5-8 basis points, respectively. The downward response is larger because commodity trading advisors (the so-called CTA strategy funds) and actively managed bond funds still lean bearish on duration, making weak data likely to trigger concentrated short covering; on the other hand, exceptionally strong non-farm numbers cannot preemptively lock in a rate hike, given that the PPI on September 10 and the CPI on September 11 have yet to be published. Bank of America suggests going long on 5-year U.S. Treasuries, positioning for a steepening of the yield curve between the 5-year and 30-year bonds, and tactically shorting the U.S. dollarwhereby weak non-farm data may drive short-term yields down faster, creating a bull market steepening; robust employment may lead to a bear flattening. However, the ultimate success or failure of this trading strategy still hinges on the CPImoderate inflation will strengthen the case for pausing rate hikes, resulting in a rebound in U.S. Treasuries and a weaker dollar; a resurgence in inflation may prompt the Fed to raise rates at the meeting on September 15-16, driving real interest rates and the dollar higher again.