Markets Lifted by Soft Labor Market Reports: Weaker-than-expected labor market reports last week raised the probability that the Federal Reserve will proceed with cutting interest rates later this month. This provided a lift to the stock and bond markets. The S&P 500 Index gained 0.4%, lifting its year-to-date return to 11.2%. Internationally, the developed markets increased 0.3% and 1.4%, respectively, bringing their year-to-date returns to 23.1% and 20.7%.

Interest rates declined along the yield curve pushing the major bond indexes higher. Yields on 2-year and 10-year U.S. Treasury Notes closed Friday at 3.51% and 4.07%, respectively, down from 3.62% and 4.23% a week ago. The Barclays Aggregate Index and the Barclays U.S. Municipal Bond Index each jumped 0.9%, boosting their year-to-date returns to 6.0% and 1.2%, respectively.

As of Friday, fed funds futures were signaling a virtual certainty that the Federal Reserve will cut the fed funds target range by 0.25% to 4.00%–4.25% at the upcoming FOMC meeting on September 17th. Futures also implied a high probability of two more 0.25% cuts by the end of the year.

Fewer Job Openings: On Wednesday, the Bureau of Labor Statistics (BLS) reported that job openings slipped to 7.18 million in July from 7.36 million in June. While openings remain at healthy levels with the ratio of unemployed workers to open positions about equal, they have declined by over 7% from the start of the year.

Payrolls Slump: On Friday, the BLS reported that non-farm payrolls increased by just 22,000 in August, well below the consensus forecast of 75,000. Additionally, previously released data for June was revised to -13,000 from 14,000. This marked the first monthly payrolls contraction since the pandemic struck in 2020. Although July’s figure was adjusted upward by 6,000 to 79,000, this did little to alter the weakening trend.

Unemployment Remains Low with Wages Firm: The unemployment rate ticked up to 4.3% from 4.2% in July. Although this measure has climbed sharply from the century’s lowest point of 3.4% reached in April of 2023, it remains well below its 25-year average of 5.7%. August’s year-over-year wage growth was a respectable 3.7%. The labor market may be softening but, overall, it appears to remain in relatively stable condition.

Multiple factors appear to be affecting the labor market data, including cuts in the federal workforce, uncertainties and cost increases associated with tariffs, and perhaps efficiencies realized through the adoption of artificial intelligence by businesses. Workforce shrinkage associated with retirements of baby boomers, deportations, and stiffened border controls has helped to keep unemployment at low levels. It is unclear whether the recent trend in payrolls will prove persistent. The overall economy and corporate profits through the second quarter were quite strong, suggesting hiring could start to pick up. Last year, payrolls slipped sharply from late spring through summer, only to rebound strongly by the end of the year. Weighing against a similar rebound this year could be the cumulative impact of tariffs, which is likely to be much greater in the second half of the year than it was in the second quarter. This week, markets will be focused on labor market and inflation reports.

Another Payroll Measure Expected to be Cut: On Tuesday, the BLS will release its preliminary estimate of the 2025 annual employment benchmark revision. The final report, due in February, will incorporate payroll data through March 2025. The benchmark revision adjusts prior employment estimates, based on surveys, to align with more comprehensive data. According to a Bloomberg analysis, the upcoming revision is expected to show a downward adjustment in the range of 400,000 to 680,000 jobs. Because this report addresses payrolls through March, it will offer little insight into the current state of the labor market and is therefore not likely to heavily impact the markets.

Inflation on the Rise: The BLS will release its August Consumer Price Index (CPI) reports on Thursday. The Bloomberg consensus forecasts for the full and core measures are 2.9% and 3.1%, respectively. These compare with 2.7% and 3.1% in July. Minor upward surprises in these reports, particularly if driven by tariffs, are not likely to alter the FOMC’s decision on rates at its September 17th meeting. This is because its members tend to view tariffs as transitory rather than a persistent driver of inflation.

Roger Khlopin, CFA
Chief Investment Officer

Aaron Nghiem, CFA, CIMA
Senior Portfolio Manager