Financial markets are closely scrutinizing each economic release for clues about the Federal Reserve's potential rate cut in September. With inflation seemingly on track towards the 2% target, the Fed's attention has shifted primarily to the labor market. This morning's August payroll report came in slightly below expectations, with July's figures also revised downward. However, wage growth and hours worked in August exceeded forecasts. 

While the labor market is showing signs of cooling, it’s not declining as sharply as some had feared. The key questions now are whether the Fed will cut rates by 25 or 50 basis points in September and what rate they consider to be neutral. Despite recent data not fully supporting it, the bond market still assigns a 37.5%* probability to a 50 basis point cut.

*per Bloomberg’s World Interest Rate Probability calculations