Fed September hike odds near 70% as payrolls loom

Dovish comments from Federal Reserve Governor Christopher Waller dragged US Treasury yields lower overnight, and Japanese government bonds tracked the move in early Tokyo trading, leaving the September rate decision resting on Friday's payrolls report.

"All eyes are on the payrolls' data after recent Fed commentary has raised the stakes for a hike while making it also more dependent on the final jobs and inflation data ahead of the meeting," said Benjamin Schroeder, senior rates strategist at ING.

The yield on the No. 382 10-year JGB fell 4 basis points to 2.920 percent in the early session, following gains in US Treasurys that the two markets tend to mirror. Market pricing for a 25-basis-point Fed hike in September climbed to about 68 percent to 70 percent, up from roughly 37 percent a week earlier, as energy prices rose and supply-chain pressures built. The repricing has also weighed on equities, with high-valuation technology stocks most exposed to a steeper rate path.

The August nonfarm payrolls report, due September 4, is the last full employment snapshot before the Federal Open Market Committee convenes. Economists surveyed by Reuters expect 58,000 jobs added with the unemployment rate holding at 4.1 percent, after July's unexpected 23,000 decline and sharp downward revisions to May and June. A separate ADP reading showed private payrolls rose just 38,000 in August, below the 47,000 forecast and the smallest gain in seven months.

A hawkish camp holds sway at the Fed

The dovish tone from Waller contrasts with a hawkish majority that has shifted its focus to preventing inflation from re-accelerating. Fed Chair Kevin Warsh told the Jackson Hole symposium that policymakers must confirm underlying inflation is returning to the 2 percent target at a sufficiently clear pace, or the Fed "will still need to take action." Governor Michael Barr took a more direct stance, arguing the Fed should raise rates decisively if upcoming data fails to prove inflation is cooling on a sustained basis.

Regional officials echoed that caution. Cleveland Fed President Beth Hammack said current interest rates are not significantly restraining the economy and that high inflation left unchecked could embed expectations of persistently higher prices. Kansas City Fed President Jeffrey Schmid described inflation as stubborn while stopping short of committing to a September hike. The July meeting drew three dissents in favor of a 25-basis-point increase, from Hammack, Neel Kashkari and Lorie Logan, evidence of a defined hawkish bloc within the committee.

Payrolls alone may not settle the debate

A moderate cooling in hiring is what markets prefer — job growth slowing without an out-of-control deterioration would ease Fed concerns about an overheating labor market without stoking recession trades. But outcomes at either extreme carry risk. Employment growth well above expectations would push the market to reassess the case for further hikes and lift Treasury yields, while a distinctly negative print would revive fears of an accelerating downturn and deepen the recent global bond selloff that has pushed yields in major economies to multi-year highs.

Even weak payrolls may not be enough to alter the path. Inflation remains above target, and the August consumer price index lands September 11, a week after the jobs report. As long as wage pressures hold and CPI again exceeds expectations, the Fed could still choose to raise rates regardless of the employment count. The bond market's next move, in both Treasurys and JGBs, hinges on how those two data points reconcile with a committee that is visibly split between Waller's caution and the hawks' resolve.

This article is for informational purposes only and does not constitute investment advice.