Strong Jobs Report Stirs Rate-Hike Bets, Yet Equities Hold Firm
TREE NEWS reports: Friday’s blockbuster nonfarm payrolls report reignited selling in U.S. Treasuries, with traders now pricing a higher chance that the Federal Reserve will raise interest rates at its September 16 meeting. The dollar strengthened, and while the S&P 500 closed lower on the day, it still managed to book a weekly gain. The Nasdaq 100 also ended the week in positive territory. Despite the bond market turmoil, risk assets have so far shrugged off the pressure.
Why Risk Assets Are Showing Resilience
The key pillar supporting equities is robust economic growth and strong corporate earnings. Director of fixed income research at Schwab Center for Financial Research, financial conditions remain accommodative, and credit spreads are unusually tight. ‘When earnings growth is above 20% year-over-year, companies don’t seem to mind current borrowing costs,’ he noted.
JPMorgan’s research highlights a divergence between the price of capital and its availability. Although borrowing costs have risen, credit creation has not contracted. Bank lending is still growing, and net issuance of investment-grade corporate bonds in the U.S. increased in August. Driven by the AI investment boom, leading companies continue to fund large capital expenditure programs with ample profits and open financing channels.
However, Martin points out that CCC-rated credit spreads have widened, while BB and B spreads have narrowed. Real estate and small-cap stocks have lagged in this rate environment, while energy and financials have benefited.
The Real Risk: A Sharp Rate Spike
iCapital’s global investment strategist Dan Suzuki warns of a more damaging scenario. ‘If rates rise sharply, investors will likely be forced to reduce risk more aggressively, and that is when market sentiment could deteriorate more substantially,’ he said.
State Street’s senior macro strategist Marvin Loh extends the analysis to a broader level. He sees the government and corporations competing fiercely for capital, while the economy continues to run well without structural support. ‘Friday’s jobs report reinforces the picture of an economy that works fine even without the structural conditions that usually lower unemployment. Market signals tell the Fed it should raise rates, and we continue to believe that will happen this year,’ Loh said.
Next Focus: CPI Data
The details of the jobs report provide more support for rate hikes. August payroll gains exceeded expectations, and prior months were revised upward, undermining the narrative of a cooling labor market. Sarah Hunt, chief market strategist at Alpine Saxon Woods, notes that the report gives doves far less ammunition than a weak reading would have. Attention now shifts to inflation—if next week’s CPI comes in hot, the case for a rate hike strengthens.
Brad Conger, CIO at Hirtle & Co., sees hints of AI displacement in the employment data. Financial activities and information sectors together lost about 34,000 jobs, while construction, manufacturing, and utilities—industries tied to data center construction, equipment supply, and energy—showed strength. ‘If you look closely, you can see the early contours of AI substitution,’ he said.
With earnings season winding down, macro data will take on greater importance in the coming weeks. Greg Boutle, head of U.S. equity and derivatives strategy at BNP Paribas, advises caution but not outright bearishness. ‘It’s time to be relatively cautious on stocks, but not yet at the stage of being bearish. Today’s payrolls are slightly hawkish but don’t really answer the Fed’s next move. The real key is next week’s CPI and whether the Fed will hike before the midterm elections,’ he said.
Key Takeaways for Investors
- Strong economic data and corporate earnings are cushioning risk assets from bond market pressure, but the decoupling may not last indefinitely.
- A sharp rise in interest rates could force investors to deleverage, triggering a more pronounced market correction.
- Next week’s CPI release is the critical catalyst; a hot print could solidify rate-hike expectations and threaten equity valuations.
