This week in the markets: strong US jobs data shorten the odds on a rate hike this month; shares and bonds tell a different story for now; and the mid-term election race begins in Dallas.

It’s Labor Day in America so the markets are closed over the pond. Despite that, attention is firmly focused on the US after last Friday’s stronger than expected jobs data and ahead of this Friday’s inflation data. Both will be key to whether or not US interest rates are hiked at next week’s Fed meeting. Ahead of November’s mid-term elections, there’s a lot at stake.

The non-farm payrolls at the end of last week were punchier than predicted. 162,000 jobs were added in August, well ahead of expectations. As important, July’s 21,000 contraction in the jobs market was revised away. Instead, it now looks like 23,000 new jobs were created.

All in all, it looks like the labour market is still firing on all cylinders. Which to most people makes an interest rate hike more likely next week. Not the US President, however. Hailing the jobs data, Donald Trump concluded that ‘a strong country means a lower interest rate, it’s a better credit…very simple!’

Which just goes to show that you can draw any conclusion you want from the economic data if you try hard enough.

The conventional view, that another quarter point rate hike is more likely now, will be further tested on Friday of this week when inflation is expected to come out at 3.4%, down from last month’s 3.7%, but still well ahead of the Fed’s 2% target.

Beth Hammack, president of the Cleveland Fed and a voting member of the Fed’s rate-setting committee, said: ‘both the hard data and the anecdotes are telling me the same thing: policy is not restrictive. Inflation is too high - and the longer it stays above our objective, the harder it will be to bring it back down’.

Higher interest rates are on the cards pretty much everywhere, as central banks around the world grapple with persistent inflation. This week, it’s the turn of the European Central Bank, and a quarter point rate hike is pretty much nailed on.

The ECB is expected to raise its GDP forecast for 2026 alongside its rate decision on Thursday. At the same time, inflation pressures are even stronger as the oil price heads back towards $100 a barrel. The drought over the summer made things worse, disrupting domestic shipping and hitting harvests.

So, a 25 basis-point rise to 2.75% seems inevitable and a further hike later in the year looks likely. Meanwhile, Japan is expected to raise its rates, in part to defend the weak yen. And here in the UK, rate hikes seem more likely than not. At least that is what the mortgage market is assuming, as fixed rate deals push higher.

Mortgage rates, of course, are not just influenced by interest rates but by the level of long bond yields, which are moving ahead in lockstep around the world. The US 10-year bond now yields 4.8% while the UK gilt equivalent is above 5.1%.

This has been bad news for bond investors, because bond yields move in the opposite direction to bond prices. But it is potentially bad news for equity investors, too. Especially for anyone holding growth shares, the value of which is determined in large part by the rate at which future earnings are discounted back to a present-day value.

Higher bond yields lower the current value of shares, all other things being equal. So, the combination of strong employment, oil near $100 and sticky inflation, are a potential headwind which, for now, the equity market seems happy to ignore.

Global shares have risen about 3% over the past month, buoyed by robust earnings growth. The continued resilience of the AI hardware sector is a striking feature of a glass-half-full stock market.

This week started on the front foot, with Tokyo up about 2% and Korea surging on the back of strong performances from Samsung and SK Hynix, up 5% and 8% respectively.

So, the question continues as it has over the summer. How high is too high for bond yields? And how long can equities shrug off the drag of higher borrowing costs?

The answer to that may be a few weeks away, because markets are in the flat period, news-wise, between earnings seasons. The second quarter results round continued the recent strong run of double-digit earnings growth. The third quarter season, which will better reflect the impact of the prolonged Gulf crisis, remains weeks away.

Here in the UK, attention in the short term is now focused firmly on the October 28 Budget, which Chancellor John Healey warned over the weekend will be another tough one. He will make his first major speech in his new role today, when he will set out plans to use state-owned financial institutions to boost investment in the economy.

Growth remains the only viable escape route from the unpopular and unavoidable choice of higher taxes or lower spending that governments have faced, and largely dodged, for years. Achieving it is another thing altogether.

The scale of the growth challenge will be evident in second quarter GDP updates this week in the UK, but also in the EU and Japan.

Rising bond yields will make the fiscal arithmetic even worse for the UK government in the weeks leading up to the Budget, reducing the government’s headroom as the cost of funding the national debt continues to rise.

Meanwhile, politics is front and centre in the US, too. Although the mid-term elections are not until November, the starting gun will be fired this week with a pre-election convention in Dallas for the Republican National Committee.

The President will be the headline act, giving a keynote speech on Thursday against a backdrop of the lowest popularity reading of his Presidency so far, as the cost of living crisis and war in the Gulf drag on.