NFP Just Flipped the Fed Trade. Now PPI and CPI Decide What Happens Next

There is a very easy mistake to make after Friday’s US employment report. You see 162,000 payrolls against expectations in the mid 50,000s, you watch Treasury yields jump and gold sell off, and you conclude the obvious thing.

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Strong NFP. Fed hikes. Dollar up. Gold down.

Too simple. Friday did not tell us the Federal Reserve definitely needs to raise rates. It told us something more useful, and more tradeable: the labour market has given the Fed more room to raise rates if inflation requires it.

That distinction is the entire setup for this week. Last week tested labour. This week tests inflation, with US producer and consumer prices landing on Thursday and Friday, and the Fed meeting four days after that.

DATA → EXPECTATIONS → RATE PRICING → YIELDS → MONEY → MARKET

Quick answer: what actually changed on Friday?

The burden of proof moved from labour to inflation.

Before Friday, the Fed could look at inflation running above target and still ask a reasonable question: what if the labour market is deteriorating fast enough that tightening further does unnecessary damage? The August report weakened that argument. It did not eliminate every labour risk, because one employment report never can, but it removed the easiest reason to sit still.

So the useful conclusion is not “NFP means the Fed hikes”. It is this.

NFP means labour probably is not stopping the Fed from hiking if inflation gives it a reason to.

• Done, Friday 4 SepAugust payrolls, +162,000
• Thursday 10 SepUS PPI, 13:30 London. ECB decision 15 minutes earlier
• Friday 11 SepUS CPI, 13:30 London. The bigger vote
• 15 and 16 SepFOMC, with fresh projections

NFP changed the Fed debate, but not in the way most traders think

The headline beat was large, but headlines are only one part of an employment report. The previous two months were also revised materially higher. June moved from a gain of 20,000 to a gain of 31,000, and July moved from a loss of 23,000 to a gain of 21,000, which put another 55,000 jobs back into the record.

That matters because one of the emerging narratives before Friday was that the US labour market might finally be starting to crack. Those revisions made the earlier picture look considerably less weak, and then August delivered 162,000 on top of it. Unemployment held at 4.1 per cent, participation edged up to 61.6 per cent, and the number of people working part time for economic reasons fell by 414,000 to 4.4 million.

So the evidence moved. Not from weak labour to booming labour, but from a possible labour break to a labour market that looks a lot more resilient than markets feared. If you want the mechanics of how this release is put together and why revisions carry as much weight as the headline, the reference sits in the KenMacro US non-farm payrolls page.

Strong employment is not the same thing as overheating

There is another layer that got very little attention on Friday. Average hourly earnings rose 0.3 per cent on the month to 37.75 dollars, and 3.1 per cent over the year. That is not screaming renewed wage inflation.

So Friday gave us an interesting combination: stronger employment quantities without an equally aggressive wage inflation signal. My description of the report is labour resilience, not necessarily labour overheating, and the distinction matters enormously for policy.

Strong employment is not inherently a monetary policy problem. If inflation is falling cleanly towards target, policymakers can have healthy employment and simply leave it alone. It becomes a problem only when resilient activity is combined with inflation that refuses to cool, and that is exactly what PPI and CPI now have to tell us.

Warsh and Waller have already given us the framework

Two Fed voices set up this week, and they did it in very different ways.

Kevin Warsh used his Jackson Hole keynote on 28 August to describe the labour market as “quite stable”, noting the jobless rate at 4.1 per cent “remains low by historical standards”, and concluding that he believes “the labor markets are consistent with full employment”. On inflation he was blunt. The 12 month change in the PCE price index stood at 3.7 per cent with the six month change at 4.1 per cent, and in his words, “inflation is running above our 2 percent target”. His conclusion was equally direct: “the Fed’s predominant focus right now should be on prices”.

What Warsh deliberately did not give the market was a reaction function. He explicitly rejected both traditional forward guidance and mechanical policy rules, arguing that publishing an explicit rate path “works better in theory than in practice”.

Christopher Waller then did the opposite. Speaking on 3 September, he acknowledged that inflation “remains meaningfully above the Federal Open Market Committee’s 2 percent goal” while adding that “recent data suggest we are finally seeing some signs of disinflation”. Then he gave traders the branches in plain language.

If disinflation continues, Waller said, “I would be inclined to support holding the target for the federal funds rate at its current setting”. If it does not, “if the incoming data for August show this improvement has been fleeting, then it may be appropriate to raise the policy rate when the FOMC meets on September 15 and 16”.

That is a reaction function, offered voluntarily, two weeks before the meeting. Different data outcome, different policy response. It is exactly how macro should be approached, and it is why I keep saying the same thing.

A macro view is not a marriage. It is a decision tree.

Not “the Fed is hawkish”. Not “the Fed is dovish”. Instead: if this happens, then this branch becomes more likely. If the concept itself is new to you, the longer explanation lives in the Fed reaction function guide.

Where markets are starting the week

Fed funds futures moved hard on Friday. The probability of a quarter point increase at the 15 and 16 September meeting rose to 58 per cent, roughly nine percentage points higher than the day before, according to the CME FedWatch tool as reported by CNBC. By Monday, wire pricing was sitting close to 60 per cent.

The front end of the Treasury curve confirmed it. The 2 year yield rose more than four basis points to 4.377 per cent on Friday and touched its highest level since January 2025, with the US Treasury’s own daily curve putting the close at 4.37 per cent. The 10 year finished at 4.78 per cent and the 30 year at 5.24 per cent.

Gold has been paying for it. Spot fell about 1 per cent on Friday, was quoted at 4,405.47 dollars an ounce in Reuters copy early on Monday, and was trading around 4,412 dollars by Monday afternoon London time, down roughly a third of a per cent on the day. The dollar index was near 98.90, easing slightly after Friday’s move. Brent was around 97.21 dollars a barrel against a Friday settlement of 96.28, with WTI near 92.70 against a 91.48 settlement.

That combination is the whole point of this week. Labour resilient, inflation still above target, energy risk elevated and the Fed decision days away, which is a market that can reprice very quickly if the inflation data surprises in either direction.

Thursday: what PPI is actually testing

August PPI arrives first, at 13:30 London on Thursday 10 September. Producer prices measure the changes in prices received by domestic producers, so think of it as a view of inflation further upstream.

It is not CPI, and I do not want traders mechanically thinking hot PPI equals hot CPI tomorrow. The relationship is not that clean. But PPI can tell us whether cost pressure is building through goods, services and transportation, and it contains components that feed into the Fed’s preferred PCE inflation measures, so it matters.

What the previous PPI report actually said

July’s final demand PPI was unchanged on the month after falling 0.1 per cent in June, but producer prices were still 4.7 per cent higher over twelve months. Inside the report, final demand services rose 0.2 per cent while final demand goods fell 0.7 per cent, and the measure excluding food, energy and trade services increased 0.4 per cent on the month and was also 4.7 per cent higher over the year.

So the previous report was not simply “inflation gone”. There were still clear areas of underlying producer price pressure. This week’s question is whether those pressures are fading, holding, or starting to rebuild.

How I would read Thursday

1. Is producer inflation becoming broader? One energy category jumping is not the same thing as broad increases across goods and services.
2. Are the PCE relevant components hot? The Fed does not set policy from headline PPI. What matters is what the detail implies for underlying inflation.
3. Does the rates market actually care? This may be the most important question of the three.

PPI can beat expectations and still produce almost no sustained repricing. If the number looks hawkish but September Fed pricing barely moves and the 2 year barely moves, the market is telling you something. Do not argue with it. Investigate it.

Friday CPI is the real decision point

August CPI lands at 13:30 London on Friday 11 September. July’s report showed headline inflation rising just 0.1 per cent on the month and 3.4 per cent over the year, with core CPI up 0.2 per cent on the month and 2.5 per cent annually.

The broad expectation into Friday is for annual headline inflation to stay around 3.4 per cent while core eases towards roughly 2.4 per cent. Recheck that immediately before the print, because consensus moves during the week. I care far more about the monthly core number and its composition than about whether somebody’s annual forecast turns out to be a tenth wide.

Waller has effectively told us why. He said his September decision will be heavily influenced by August inflation, that continued progress towards 2 per cent supports a hold, and that a hot print could support a hike. It does not get much clearer than that from a sitting governor two weeks out.

And then there is the third scenario nobody prices

Imagine headline CPI comes in hot, but most of the heat comes from energy while core inflation continues improving. Now it gets complicated, because the Fed cannot manufacture oil and it cannot reopen a disrupted shipping route by changing the fed funds rate.

Policymakers may respond very differently to a supply driven energy shock than to broad domestic demand inflation. That is where you can get a rising headline, an improving core trend, and a far less aggressive front end repricing than the headline alone would suggest. For the yield curve and for gold, that distinction is the whole trade.

“Yields are rising” is not enough

One of the most dangerous shortcuts in macro trading is yields up equals gold down. Ask which yield, then ask why.

If the 2 year is surging because markets are pricing a more aggressive Fed, and the dollar is strengthening alongside it, that is a clear short run monetary policy headwind for gold. But imagine instead that the 10 year and 30 year are rising on inflation, energy, fiscal credibility, Treasury supply or term premium, while the dollar struggles. That can be a completely different gold environment.

Same direction in yields. Different mechanism. Different trade. I wrote the full version of this argument in why the dollar can fall when US bond yields rise, and the underlying mechanics are in bond yields for FX traders.

The chart shows the reaction. The driver explains why.

Oil is the unscheduled inflation release

Thursday and Friday have scheduled release times. Oil does not, and that is exactly why energy deserves its own place on the screen this week.

Brent has been trading near 97 dollars a barrel while disruption and tension around Gulf shipping continue to feed inflation concerns. Waller himself acknowledged the risk, noting that “energy prices have moved up again and remain significantly higher than they were at the beginning of 2026”, even while arguing the underlying disinflation trend has recently improved.

That produces an important distinction between current underlying inflation and future inflation pressure entering through energy and supply costs. Friday’s CPI is backward looking. Markets are forward looking. So even a softer print does not automatically make the energy story disappear, and if oil keeps climbing, markets can start trading the inflation pressure that may appear in future data. The transmission is covered in how geopolitical risk moves oil.

And then there is Trump

President Trump added another contradiction to the rates story after Friday’s employment report. He renewed his push for lower interest rates and tied it to a trade threat, writing that the US should “lower the rate or I’ll stop trading with countries with which we have a deficit”, and describing that approach as better than tariffs.

Forget the politics for a moment and think about the transmission. Trump wants lower rates. But more aggressive restrictions on trade can mean less supply, higher import costs, higher domestic prices, more inflation pressure and therefore less room for the Fed to ease.

That does not mean every tariff automatically causes runaway inflation. It means there is a potential contradiction between demanding easier monetary policy and pursuing policies that make the inflation side of the Fed’s mandate harder to satisfy. Which is another reason this week’s inflation data carries so much weight.

The full KenMacro PPI and CPI decision tree

This is the map I would keep beside the screen on Thursday and Friday.

This is why I do not need to predict the exact number. I need to know what the market currently believes, what would change that belief, and where the money moves if it changes.

The release day order matters

When PPI or CPI drops, I am not looking at gold first. Gold is the last thing I look at, not the first.

1. Read the data. For CPI that means headline month on month, headline year on year, core month on month and core year on year. Then composition.
2. Check Fed pricing. Did the probability of a September hike actually change? If you are unsure how to read it, start with how to read CME FedWatch.
3. Check the US 2 year yield. Is the rates market confirming the interpretation?
4. Check the dollar index. Is the currency market confirming the policy move?
5. Check gold. Is it behaving consistently with that monetary policy impulse?
6. Check the longer end. Are the 10 year and 30 year moving for the same reason as the 2 year, or a different one?

That last question becomes especially important if energy or inflation expectations are driving the move rather than the expected path of Fed policy.

What if CPI is hot and gold goes up?

Good. Now you have something worth investigating.

Do not stare at the economic calendar and announce that gold is wrong. Markets are rarely under any obligation to obey your correlation spreadsheet. Ask better questions instead. Did the 2 year actually rise? Did Fed pricing genuinely increase? Did the dollar strengthen? Did long end yields move more aggressively than the front end? Did inflation expectations rise? Is oil moving? Is geopolitical demand affecting gold?

If hot inflation is being interpreted as a Fed tightening story, the normal monetary policy channel should matter. If it starts being interpreted as an inflation credibility, stagflation or fiscal risk story, gold can trade very differently. The reaction is information, and a previous version of this exact problem is worked through in why the dollar moved after CPI.

What if CPI is cool and gold does nothing?

Same principle. Do not force the textbook trade.

Perhaps the cool number was already priced. Perhaps the details were less dovish than the headline. Perhaps Fed pricing barely changed, or the dollar is being supported by a relative rate story somewhere else, or gold has another dominant driver entirely. This is why the economic number is only the beginning of the analysis rather than the end of it.

The framework underneath all of it

Everything in this article reduces to one chain.

DATA → EXPECTATIONS → RATE PRICING → YIELDS → MONEY → MARKET

PPI and CPI are data. The important question is what those numbers do to expectations. If expectations change, interest rate markets reprice. If rates reprice, yields move. If yields move, relative returns across currencies, bonds, equities and commodities change. Then, finally, the chart moves.

Most traders start at the bottom of that chain. We start at the top.

What this means for gold

Gold is sitting in the middle of several competing forces. On one side there is strong labour, higher short term rate risk and potentially higher real yields, which are monetary policy headwinds. On the other there are elevated energy prices, geopolitical risk, inflation uncertainty, fiscal concerns and longer term structural demand, which can provide support.

That is why the cleanest gold trade this week is not “I think CPI will be hot”. It is conditional. If CPI is hot and Fed pricing rises and the 2 year rises and the dollar confirms, I have a much stronger monetary policy reason to expect gold pressure. If CPI cools and hike pricing falls and the 2 year falls and the dollar weakens, gold gets a much cleaner supportive rates backdrop.

That is a trade framework. A CPI prediction is not. The current positioning read sits in the KenMacro gold forecast, and the mechanism connecting the two is in how the dollar moves gold.

What this means for the US dollar

The dollar has a complication the others do not. It is a relative price.

Even if US rate expectations rise, other central banks can be tightening at the same time. The ECB meets on Thursday, 15 minutes before US PPI, and all 65 economists in a Reuters poll taken between 31 August and 3 September expect a 25 basis point increase to a 2.50 per cent deposit rate. That matters, because you can get higher US yields and still see a less explosive dollar reaction if European or Japanese rate expectations are moving aggressively alongside them. Rate direction is not enough. Relative rate direction is what prices a currency.

What this means for equities

A strong economy does not automatically equal a bullish stock market outcome. Friday’s payrolls report was encouraging for economic resilience, but if resilient growth allows the Fed to keep policy tighter, equity valuations have to deal with higher discount rates and higher bond yields.

That is why good economic data can sometimes create bad asset price reactions. Markets price the policy consequence, not the emotional label attached to the release.

The bottom line

The story is actually very simple when you lay it out in order. Warsh says labour looks strong and inflation is still too high. Waller says that if disinflation continues, patience makes sense, and if it reverses, tighter policy may be needed. NFP says labour is more resilient than markets feared. PPI is the first test of the inflation pipeline, CPI is the major test of whether disinflation is genuinely continuing, and the Fed meets immediately afterwards.

So the map is short. Hot inflation, with labour resilient, means the Fed has room to tighten, hike pricing rises, the 2 year rises, the dollar gets support and gold fights the rates trade. Cool inflation, with labour resilient and disinflation continuing, means less need to tighten, hike pricing falls, the 2 year falls, the dollar loses support and gold gets breathing room.

But do not blindly trade those arrows. Watch the reaction.

The number tells you what happened. The reaction tells you what the market thinks it means.

That is the difference between reacting to a candle and actually understanding the trade. Friday’s payrolls did not prove the Fed needs to hike. It proved the labour market is resilient enough that the Fed has more room to hike if inflation requires it, and with September pricing sitting close to a coin toss, this week’s inflation numbers can still move the entire trade.

Process over prediction.

Watch the full breakdown

I break the whole story down visually in Inside The Read Ep. 2, including the NFP flip, the Fed reaction function, Trump, yields, the dollar, gold and exactly what CPI could change next. It runs about seven and a half minutes, and it is the video companion to everything above. Watch Inside The Read Ep. 2 on YouTube, or scroll back up and play it here.

Frequently asked questions

Ken Chigbo has spent 18 years around financial markets and founded KenMacro to make institutional style macro thinking understandable to everyday traders.

Educational purposes only. Nothing in this article constitutes investment advice or a recommendation to buy or sell any financial instrument. Trading and investing involve risk.

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