Baker Market Update 2026-09-04

Bond yields rose this week as a blowout August employment report put a Fed rate hike back on the table for this month's meeting.

It was a strange week for labor data in that nearly everything pointed one direction until Friday morning, when the only number that really matters pointed the other way. On Tuesday, the JOLTS report showed July job openings edged up to 7.3 million, but the hiring rate slipped to 3.2% from 3.4% and hires in professional and business services fell by 188k, leaving the "low-hire, low-fire" description of this labor market intact. On Wednesday, private payroll firm ADP reported private payrolls grew just 38k in August, below the 47k expected and the weakest reading since January, with manufacturing (-17k) and professional/business services (-16k) both shedding jobs. Then came Friday. The BLS reported the economy added 162,000 jobs in August, roughly three times the 55k consensus and the largest monthly gain since March. For perspective, the average monthly gain over the prior 12 months was just 31k. The gains were led by food services and drinking places (+59k) and local government education (+42k), the latter almost entirely reversing last month's decline, while the information industry lost 23k jobs. And unlike last month, the revisions helped. June was revised up 11k to +31k and July's headline loss of 23k jobs became a gain of 21k, a 44k swing that erases the negative print that drove the narrative all August. The 3-month average payroll gain now stands at 71k, up from 38k. Just as importantly, the household survey finally cooperated. Recall that July's 4.1% unemployment rate was widely dismissed because the labor force shrank and participation fell to a multi-decade low. In August the labor force grew 683k, household employment rose 569k, the participation rate ticked back up to 61.6% and the unemployment rate still held at 4.1%. Wages rose 0.3% for the month and are up 3.1% from a year ago.

For a Fed that already had three dissenters voting to hike in July and a Chairman who spent Jackson Hole promising to defend the inflation target, this report certainly reduces the importance of the labor market as a reason to wait. Fed funds futures now price a 58% chance of a 25bp hike on September 16, up from 49% on Thursday. For the week, the 2yr yield rose 5bp to 4.39%, its highest level since January 2025, and the 10yr rose 5bp to 4.78% after touching 4.82% on Wednesday, the highest since November 2023. Keep in mind that was a round trip, as yields first spiked early in the week on the oil-driven inflation scare, then retraced, then jumped again Friday morning.

Markets are closed Monday for Labor Day. The focus for next week will be Friday's August CPI report, the last major data point before the FOMC meets. With headline PCE already at 3.7% and crude still elevated on the Iran conflict, a hot inflation print could settle the September rate hike debate.