Bond traders are on high alert as non-farm payroll data may influence the Federal Reserve's interest rate hike outlook for September.

Bond investors are closely monitoring the U.S. labor market data set to be released on Friday, which could ease growing market expectations of an interest rate hike by the Federal Reserve at its next meeting in September. The interest rate swap market currently anticipates that the probability of a 25 basis point rate hike by the Fed in September has exceeded 50%. Reports on Thursday indicated that if inflation data remains high in the coming weeks, Fed Chair Kevin Walsh is prepared to raise rates, further increasing this probability. If there are signs of weakness in the labor market, it may alleviate concerns about a tight job market driving inflation higher. The U.S. Consumer Price Index and Producer Price Index for July will be released next week, and these data could ultimately determine the interest rate trend. If you were the Fed Chair, what you would hope for is 'Goldilocks' employment data, not too strong and not too weak, said Hank Smith, chief investment strategist at Haverford Trust. Throughout most of this year, our baseline judgment has been to expect one rate hike in December, but we acknowledge that the probability of a September hike has increased." Economists expect that nonfarm payrolls in July will increase by about 80,000, up from June, but still at a lower level for the year. Data released by the U.S. Bureau of Labor Statistics this Tuesday indicated that the labor market remains fundamentally stable, with limited layoffs.