Wage data may overshadow payrolls as bond market strains rise

Another NFP Friday arrives. Typically, the US jobs report prompts one key market question: how many jobs were added during the month? This month, however, the bar is set higher.

Inflation worries were already elevated as markets approached the payrolls data, and the ISM manufacturing report from the previous day did not ease those concerns. The headline index held steady at 54.5, but the prices paid component surged to 77.9 from 71.1, drawing attention.

This sets a different tone for the jobs figures due later on Friday.

September's non-farm payrolls are forecast to increase by about 90,000, with the unemployment rate seen steady at 4.1%. Without a large deviation, wage data may carry greater market significance. Average hourly earnings are expected to rise 0.3% month-on-month and 3.2% year-on-year.

The focus has shifted: markets now question not just labour market strength but whether it is inflationary.

This distinction is important given that Treasury yields are at elevated levels after weeks of increases. The 10-year yield briefly touched 5.34% on Wednesday, a level not seen since 2002, before retreating as buyers returned.

The pullback provides some respite for broader markets, but the bond market's risks remain.

A strong wage figure combined with solid payrolls could renew calls for a Federal Reserve rate increase and trigger another yield surge. Such a scenario might unsettle broader markets, affecting equities, the dollar, and gold.

Given these conditions, weaker payrolls may not calm markets if wage growth stays persistent.

This alters how the jobs data will be interpreted. As usual, the payroll count will grab the first headlines. Yet with inflation sensitivity high and long-term yields near critical levels, wage data may determine whether bond markets settle before the weekend or become more volatile.