Jobs Came In Hot. Chips Didn't Care.

GOOD MORNING, Friday gave investors a classic “good news is bad news” session. August payrolls came in nearly three times stronger than expected, pushing Treasury yields higher and putting a September Fed hike firmly back in play. The S&P 500, Dow and Nasdaq all finished lower. But one corner of the market refused to follow the macro script: semiconductors jumped 3.4%, helped by another round of evidence that hyperscalers are still writing enormous checks for AI infrastructure. The tension heading into next week is getting cleaner — rates are becoming less friendly, but the AI capex cycle still has momentum.

MARKETS | TLDR

Wall Street closed lower after the jobs surprise: The S&P 500 fell 0.38%, the Dow lost 0.51% and the Nasdaq slipped 0.29% as stronger hiring revived expectations for another Fed hike.
Treasury yields moved higher: The 2-year yield finished near 4.37% and the 10-year near 4.78%, while markets put the probability of a September hike back above 50%.
Semiconductors bucked the broader selloff: Chip stocks gained about 3.4% even as the major indexes fell, showing that AI infrastructure demand is still strong enough to offset some of the pressure from rising rates.

JOBS

Good Economic News Just Became a Rates Problem Again

U.S. employers added 162,000 jobs in August, the biggest increase in five months and almost three times the 56,000 economists surveyed by Reuters had expected. July payrolls were revised from a 23,000 decline to a 21,000 gain, while the unemployment rate held at 4.1% even as the labor force expanded by 683,000. Hiring also broadened across industries, with leisure and hospitality, construction, manufacturing and government all adding jobs.

For markets, that strength matters because labor weakness had been one of the clearest arguments for the Fed to remain patient. The report weakened that case. Short-rate futures pushed the probability of a September hike above 60% during the session, Treasury yields rose and equities moved lower. Stronger employment is good for the economy, but when inflation is already elevated and energy prices are rising, it also gives policymakers more room to tighten.

There is an important caveat: wages are not flashing the same warning. Average hourly earnings were up 3.1% from a year earlier, the slowest pace since 2021, and several strategists argued that CPI will still matter more than payrolls for the September decision. That leaves the Fed with a cleaner question: if next week’s inflation data stay hot, the labor market is no longer providing much cover for waiting.

AI CAPEX

AI Spending Is Still Strong Enough to Fight the Tape

Broadcom gave investors another reminder this week that the AI infrastructure buildout is still getting larger. The company said AI chip revenue could reach roughly $115 billion in fiscal 2027 and double again to about $230 billion in 2028, driven by hyperscalers spending heavily on custom accelerators and networking. Its latest quarter produced $16.7 billion in AI chip sales, helping total revenue reach $29.59 billion.

That demand helps explain Friday’s divergence. The broad market sold off as yields climbed, but semiconductor stocks rose 3.4%. AI hardware is behaving less like a conventional long-duration growth trade and more like an earnings story backed by very large, already-committed capital budgets. Nvidia’s nearly $13 billion agreement to acquire Hugging Face adds another layer: the industry’s biggest chip supplier is now spending to secure its position higher up the developer stack as well.

The catch is expectations. Broadcom’s near-term revenue forecast still came in slightly below Wall Street estimates, and Nvidia’s Hugging Face deal does not have an obvious immediate financial return. The AI trade can keep resisting higher rates as long as revenue and capex visibility keep rising fast enough. But the bar is moving with them — and a market paying for years of infrastructure growth leaves less room for even small disappointments.

HEADLINES

Oil finished a volatile week near six-week highs: Brent remained around the mid-$90s as U.S.-Iran tensions kept supply risk elevated, adding another inflation variable just as the Fed weighs whether to tighten again.
Lululemon fell about 18% after another forecast cut: Incoming CEO Heidi O’Neill inherits a brand whose core leggings business is losing momentum while its cost structure still reflects a faster-growth era.
Adobe’s leadership change failed to calm AI concerns: Shares fell sharply Friday after Anil Chakravarthy was named CEO, with investors still focused on whether generative AI can defend Adobe’s creative-software moat.
FICO sank as mortgage scoring competition widened: Fair Isaac dropped after Fannie Mae and Freddie Mac were directed to broaden lender use of rival VantageScore, showing how quickly regulation can reshape the economics of a dominant data franchise.
The dollar strengthened and gold fell after payrolls: The dollar index rose while spot gold dropped about 1.2%, extending the cross-asset message that markets were repricing toward tighter U.S. policy.

UPCOMING

Labor Day — September 7: U.S. markets are closed Monday, creating a three-day gap before investors can fully react to any weekend developments.
U.S. PPI — September 10: Producer prices will be the first major inflation test after the jobs report revived the possibility of a September hike.
U.S. CPI — September 11: August consumer inflation is now the key data point for a Fed that has less reason to worry about near-term labor-market weakness.
FOMC — September 15-16: The Fed’s next meeting will include updated economic projections, with markets again debating whether another 25-basis-point increase is coming.

DEEP INSIGTHS

Christopher Waller: The Economic Outlook and Some Comments on My Policy Communication

Read this because it captures the Fed debate immediately before the jobs report. Waller said he would be inclined to support holding rates steady if incoming data confirmed that inflation was cooling, while leaving the door open to a hike if the improvement proved temporary. Friday’s payroll surprise makes that conditional framework even more dependent on next week’s CPI.

Kevin Warsh: In Our Time

Warsh’s Jackson Hole speech is the broader framework behind this market regime. He argues that AI and other investment are raising the economy’s growth potential while the Fed should rely less on forward guidance and more on incoming market and economic signals. That combination helps explain why stronger jobs, higher yields and continued AI capex can coexist — and why the market is having to price growth and tighter policy at the same time.