Analysis: August non-farm payrolls appear strong on the surface, but underlying growth is only around 60,000, raising the probability of a Federal Reserve interest rate hike this year.

Analysts said that U.S. non-farm payrolls rose by 162,000 in August, significantly exceeding the market expectation of 56,000, with a total upward revision of 55,000 to the prior two months’ data. Specifically, July’s non-farm payrolls were revised from a decrease of 23,000 to an increase of 21,000. However, after excluding one-off factors such as the rebound in leisure and hospitality employment and government education sector hiring, August’s underlying employment growth was around 60,000, meaning the overall labor market is not as strong as the headline figures suggest. The report noted that the August unemployment rate held steady at 4.1%, the labor force participation rate rebounded to 61.6%, and the broad U-6 unemployment rate fell from 7.9% to 7.7%, indicating that returning labor supply was absorbed by corporate demand, with an improvement in employment quality. Yet year-on-year growth in average hourly earnings slowed further to 3.1% from the prior reading of 3.2%, lower than July’s 3.4% CPI growth, signaling the labor market has not re-heated. Regarding Federal Reserve policy, GF Macro stated that August’s non-farm payroll data refuted both extreme narratives of a “jobs collapse” and a “re-overheating labor market,” but objectively raised the probability of a rate hike this year, as the labor market’s resilience has reduced concerns about further policy tightening. However, whether the Fed will raise rates in September will still depend mainly on the upcoming August inflation data. In markets, following the data release, the implied probability of a September rate hike from the FedWatch tool rose from 50% to 58.6%, with 2-year and 10-year U.S. Treasury yields increasing by 4 basis points and 1 basis point respectively to 4.37% and 4.78%. Major U.S. stock indexes closed slightly lower, but the AI hardware sector bucked the trend, with the Philadelphia Semiconductor ETF (SOXX) rising 3%.