September 4, 2026
The prior week’s Jackson Hole keynote by new Federal Reserve Chair Kevin Warsh struck a more hawkish tone for markets attempting to determine if this week’s data provided greater clarity for the direction of monetary policy. The August employment report showed nonfarm payrolls rose 162,000, nearly three times the 55,000 consensus, with private payrolls adding 127,000 and manufacturing gaining 16,000. Upward revisions to the prior two months lifted the three-month average payroll gain to 71,000, nearly double the revised prior pace. The unemployment rate held at 4.1%, labor force participation edged up to 61.6%, and the underemployment rate fell to 7.7% from 7.9%. Average hourly earnings rose 0.3% for the month and 3.1% from a year earlier, a pace that puts little pressure on prices. The economy entered September on firmer footing than the summer data had suggested, and the constraint on monetary policy now runs through prices rather than employment.
Aside from the upside surprise to payrolls, not all the labor data agreed. ADP counted just 38,000 private jobs against a 47,000 consensus, the four week average of initial claims rose to 207,250 from 205,500, and Challenger’s announced job cuts increased to 52,881 from 33,429. The service sector activity firmed alongside the labor data, as the ISM Services Index rose to 55.4 from 54.1 in August and its prices paid component climbed to 72.6 from 70.3. Manufacturing was softer, with the ISM Manufacturing Index at 54.6 and new orders down to 53.7 from 56.7. Neither a firmer labor market nor rising service sector input costs would move the policy debate alone.
The 2-year Treasury yield is approximately 4.37% and the 10-year 4.77% as of this morning, up roughly 3 and 4 basis points, a near-parallel shift that left the spread near 40 basis points. The 10-year has not been higher since January 2025, after a weekend U.S. strike on Iranian rocket launchers disrupted traffic through the Strait of Hormuz. West Texas Intermediate crude peaked at $93.14 intraweek, its strongest since late July, and currently trades near $91. The S&P 500 is essentially unchanged on the week at roughly 7,712, and gold is little changed as well near $4,422.
Our team continues to expect the Federal Open Market Committee (FOMC) to hold the federal funds rate in its current 3.50% to 3.75% target range through the remainder of 2026. The question is whether the energy shock reaches core prices before the September 15-16 meeting. August CPI will be released next Friday, and is the last inflation reading before they meet. Futures now put the odds of a quarter-point increase near 59%, up from 52% before this morning’s report. We expect the term premium to keep rebuilding at the long end, arguing for a steeper curve. We continue to manage portfolios with an emphasis on high credit quality, ample liquidity, and disciplined management of duration and credit risk.
Next Week: Consumer Credit, ADP Employment Change, Initial and Continuing Jobless Claims, Producer Price Index (PPI), Existing Home Sales, Consumer Price Index (CPI), University of Michigan Sentiment (preliminary).
Written by Scott Prickett, CTP, Co-Chief Investment Officer