NEWS AND INSIGHTS | INSIGHTS

CIO Notebook: Surprise Strength in Payrolls Boosts Fed Hike Probability

September 04, 2026
Shannon L. Saccocia, CFA, Chief Investment Officer—Wealth

We maintain a risk-on, overweight equities posture, favoring global diversification, credit, and duration opportunities, plus commodities exposure – we encourage investors to rebalance toward strategic targets during any pullbacks ahead of the U.S. midterm elections.

August non-farm payrolls bested expectations by a wide margin, increasing by +162k versus the +55k consensus– a sharp contrast from the disappointing ADP report earlier this week, which showed payrolls up only +38k. The release also reflected a swing from July’s downward revisions, as both June and July were adjusted upward by a combined +55k, flipping the July report from negative to positive territory.

There were a lot of positives in the print. Leisure and hospitality reversed last month’s losses, growing by +62k, with +59k coming from jobs created in food and drink establishments; this was well above the trailing twelve-month trend of +12k. A seasonal winner, local government education added +42k (although it remains flat on the year), while health care added a modest +13k, while social assistance contributed another +16k. Manufacturing grew by another +16k, with the industry now up +58k since the recent December 2025 low. Construction chipped in +22k – a strong print, albeit slightly weaker perhaps than hoped given the enthusiasm around data center and other areas of AI infrastructure buildout. Conversely, the information sector lost -23k; this segment of the economy, along with financial services, continues to bear the brunt of AI disintermediation.

Not only were payrolls higher, but labor force participation strengthened in August as well, jumping from 61.6% from 61.4%. The number of employed persons rose by +569k, with unemployed only up by +115k. There was also an increase of +121k in job leavers, perhaps a sign that workers are feeling more optimistic about the economy and their ability to find a better position in this environment. Average hours worked ticked up to 34.4 from 34.3, and average hourly earnings rose by +0.3%, or +3.1% on a year-over-year basis.

In terms of the September Fed meeting, this report puts even greater emphasis on the August CPI and PPI readings. Fed Chair Kevin Warsh is already on record that he believes “the labor markets are consistent with full employment,” however this report indicates an economy that might be strengthening faster than anticipated – putting further pressure on prices. More comforting is the level of wage growth, which remains at a rate that is unlikely to compound a move higher in prices from the continued conflict in the Middle East and the threat of AI related supply-demand mismatches.

Will there be a hike in September? Our view is that the Fed is leaning towards one, but a much cooler set of inflation data could justify a hold for several of the voting members of the FOMC. Bond markets are reflecting an increased likelihood of that occurring following today’s report, with the probability now above 60%, while equity markets are reflecting a more nuanced reaction, with the S&P 500 lower while the Nasdaq and Russell 2000 are higher. The long end of the Treasury curve remains a source of concern for investors, consumers, and particularly Treasury Secretary Scott Bessent. While the Fed’s actions might have a small impact on the long end, investors are likely to see greater movement in the short end of the curve as a result of upcoming data releases.

The response to today’s announcement reflects a “good news is bad news” scenario – but in our view, a stabilized labor market and continued growth impulse from the massive investment in AI are the foundation for our risk-on posture. We remain overweight equities, encourage investors to globally diversify their exposure, and see opportunities in both credit and duration due to strong corporate balance sheets and continued curve volatility. We also view commodities as an important lever in portfolios to add exposure to what are likely to be increasingly limited resources. We encourage investors to review their overall asset allocations and take advantage of any pullbacks ahead of the U.S. midterm elections to position their portfolios back to strategic targets.

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