Article by Dong Jing, Wall Street View
Wall Street is closely watching the upcoming August non-farm payrolls report, but Bank of America’s latest warning: Don’t be fooled by the non-farm data—it’s just an appetizer; the real deciding factor for a September Fed rate hike lies in the subsequent CPI data.
According to Zhui Feng Trading Desk, Bank of America's latest interest rate and foreign exchange research report, released on September 2, stated that the August non-farm payroll data was merely a "warm-up," with the key variable determining whether the Fed will raise rates in September being the upcoming CPI inflation data.
The report states that Bank of America expects only 40,000 non-farm payroll additions in August (35,000 in the private sector), significantly below market consensus, with the unemployment rate holding steady at 4.1%. At the Jackson Hole symposium, Federal Reserve Chair Powell used inflation-related terms roughly twice as often as labor market terms, clearly indicating that inflation remains the primary anchor for current monetary policy. The probability of a September rate hike is currently around 70%, but the final determination awaits the release of next week’s CPI and PPI data.
The bank believes the current market exhibits an extremely asymmetric risk-reward profile: the rebound in U.S. Treasuries following an underwhelming NFP report will far exceed the sell-off triggered by a stronger-than-expected report. Based on this, Bank of America recommends that investors go long 5-year U.S. Treasuries, construct a 5-year/30-year U.S. Treasury yield curve steepening trade, and tactically short the U.S. dollar.
August Non-Farm Payrolls Forecast: Seasonal Weakness, but Unemployment Rate Expected to Remain Stable
Bank of America expects non-farm payrolls to increase by 40,000 in August (private sector: 35,000), below market consensus but consistent with the typical seasonal weakness observed in summer months. Historical data shows that August non-farm payrolls have often delivered downward surprises, particularly in recent years due to lingering seasonal factors from summer; ADP data has also remained weak.
Nevertheless, the three-month average of private-sector job growth will remain around 30,000, near the economy's break-even level. The unemployment rate (U3) is expected to hold at 4.1%, but could rise to 4.2% if labor force participation rebounds.
Bank of America explicitly noted that, given Wash's latest comments on the resilience of the labor market, even weak non-farm payrolls data would have a limited impact on pricing for a September rate hike.
Wash Jackson Hole speech sets the tone: inflation takes precedence over employment
Bank of America analysts conducted a word frequency analysis of Wash’s speech at the Jackson Hole symposium, yielding highly compelling results: inflation-related terms (including inflation, prices, price stability, PCE, CPI, and inflation expectations) appeared 61 times, while labor market-related terms (including labor, employment, unemployment, jobs, wages, and workers) appeared only 30 times—nearly half as many.
This data directly reveals the Fed’s current policy priorities: inflation is above employment. Wessel described the current labor market as nearing full employment, emphasizing stable unemployment claims and a steady unemployment rate, rather than viewing weak job growth as a primary risk signal.
This means that even if the August non-farm payrolls data comes in weak, the impact on expectations for a September rate hike will be limited.
Asymmetric博弈 in the interest rate market: Non-Farm Payrolls are just the "opening act," while CPI is the "main event."
In Bank of America’s view, the non-farm payrolls report is at best a “prelude”—next week’s CPI will be the “main event” determining the direction of the September FOMC meeting.
Notably, Bank of America specifically highlighted a critical timing issue: the August non-farm payrolls report is the last major data point before Fed officials enter the "blackout period."
This means that after the non-farm payrolls data is released, Fed officials will have a brief window to publicly comment on the policy implications of the labor market data. However, by the time the CPI data is released next week, officials will have entered the blackout period and will no longer be able to provide additional guidance to the market.
Therefore, any comments from Fed officials following the non-farm payrolls data release will have an unusually significant impact on how the market interprets the CPI data and shapes expectations for September policy.
In the current interest rate environment, Bank of America’s core assessment is that the non-farm payrolls data has a clearly asymmetric impact on the interest rate market.
Specifically:
If the unemployment rate rises to 4.2%, the 2-year U.S. Treasury yield is expected to decline by 5 to 12 basis points, and the 10-year yield by 5 to 10 basis points;
If the unemployment rate falls to 4.0%, the 2-year U.S. Treasury yield is expected to rise by 5 to 6 basis points, and the 10-year yield by 5 to 8 basis points;
If the unemployment rate remains at 4.1%, yields across all maturities will fluctuate by approximately 5 basis points in both directions.
Behind this asymmetry are two key logic points: First, CTA (Commodity Trading Advisors) and active bond funds currently maintain relatively bearish duration exposures, meaning the market is more likely to trigger short covering if the data comes in weaker than expected; second, even if the non-farm payrolls data is strong, it may not be sufficient to fully lock in a September rate hike, leaving uncertainty in the market until the CPI release.
In addition, historical patterns impose constraints on the timing of rate hikes. Bank of America also highlights a significant political calendar constraint: since 1990, the Federal Reserve has never initiated a new tightening cycle at an FOMC meeting immediately preceding a national election. If no rate hike occurs in September, the next viable meeting window may be pushed to December, as the October meeting is too close to the midterm elections.
Trading Strategy and Forex Outlook: Long 5-Year U.S. Treasuries, Tactical Short on the U.S. Dollar
Given the aforementioned asymmetric risk and the Federal Reserve’s reestablished credibility, Bank of America recommends going long 5-year U.S. Treasuries and constructing a 5-year/30-year U.S. Treasury yield curve steepening trade. Bank of America expects weak nonfarm payrolls to cause a bull steepening of the yield curve, while strong data could lead to a bear flattening.
At the foreign exchange level, Bank of America’s assessment aligns with its interest rate strategy logic: the dollar faces asymmetric risks, where the downside potential exceeds the upside potential under equally sized data beats or misses.
Under the current backdrop, the probability of a September rate hike is already priced in at around 70%, and speculative long USD positions (IMM data) remain net long, though recent U.S. economic data have continued to come in soft. Bank of America notes that the dollar’s movement this summer has been driven more by U.S. policy events than by actual data.
Bank of America also noted that the dollar's delayed repricing after Jackson Hole may reflect lingering bearish sentiment following the unexpected announcement of Treasury repurchase operations in late August.
If the Fed ultimately follows through with rate hikes, it will effectively curb the "dollar depreciation" narrative; if it repeats the dovish stance of the July FOMC, the credibility rebuilt at Jackson Hole will quickly collapse, causing the dollar to decline.