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A soft labor market means a hard path forward
The U.S. labor market hit the brakes last week. Job openings dropped to the lowest level since 2020 and, for the first time since 2021, unemployed workers outnumbered available positions. August’s nonfarm payroll report disappointed again, reporting just 22,000 jobs added versus expectations of 75,000. June was revised down to -13,000, which was the first monthly job loss since 2020. The unemployment rate crept up to 4.3%, the highest in three years (but still low by historical standards).
Private payrolls also disappointed, missing even worse than the earlier ADP results. With only 38,000 jobs added, employers are still pulling back amid trade uncertainty and tariffs. Immigration crackdowns and demographic shifts are constricting labor supply, just not fast enough to match diminishing demand. Translation: the job market isn’t collapsing, but it’s definitely losing momentum.
For the Federal Reserve, this data was a flashing yellow light. Futures markets are now pricing in a 100% chance of a September rate cut, with a 10–12% chance that it’ll be a jumbo 0.50% cut. Longer term, traders see as many as six cuts by 2026, bringing rates closer to 3%. The Fed’s Summary of Economic Projections, out with the September meeting, will clarify how realistic that assumption might be. Bond markets reacted fast to the poor data, pushing the 2-year and 10-year Treasury yields below 3.5% and 4.1%, respectively. These marked the lowest of the year, and helped contribute to a steepening yield curve (good news for our bank stocks).
Stocks danced to the tune of rate-cut optimism but pared some gains in Friday trading. The Nasdaq gained 1.14% on the week, powered by Apple and Alphabet after a favorable antitrust ruling. The S&P 500 inched up 0.33%, while the Dow slipped 0.32%. Gold stole the spotlight, hitting fresh all-time highs as investors sought safety. Oil prices dipped, and crypto stayed relatively quiet.
The Fed’s other mandate—inflation—takes center stage in the coming week. Headline CPI is expected at 2.9%, while core CPI may hold at 3.1%. Producer prices (PPI) are seen easing slightly after the blowout report in July, though tariffs continue to add cost pressure. Rent trends show signs of cooling, which could help tame sticky services inflation down the line as the number of movers shrinks further.
What this means for investors
The labor market slowdown has raised the odds of Fed rate cuts substantially, which typically support stocks and lower borrowing costs. Love it or hate it, a single rate cut alone can’t hurt or harm the economy a whole lot. The pace and volume of cuts will dictate how much additional aggregate demand we can expect. But with inflation still above target, loosening the restraints on demand amid tariff-induced supply constraints won’t help tamp down price increases. Due to inflation and growth issues, investors should brace for volatility while looking for opportunities to add quality holdings on dips.
Market Activity
S&P 500 all-time high (9/4): 6,502.08
- The 21st all-time high of 2025
Stocks
Fixed income
Economic Reports
Last week was a dismal week for economic reports. But the silver lining is the market mostly loved it (rate cuts, baby).
Next week, we find out exactly how big of a pickle the economy is in. The labor market is screeching to a halt, and we may still have a large downward revision for past jobs data on Tuesday. PPI and CPI will give us insight into whether inflation is showing signs of plateauing. Or are we in for further acceleration into full-blown stagflation?
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Chart(s) of the week
How can the market keep going up? This is why. Josh Brown talks about the relentless bid often, and this is what he means. So much money is funneled from automatic investments into the market (and the largest companies specifically), it is hard to keep the market down. 70% of Americans have access to a 401(k) and 50% (and growing) are participating. This isn’t going to stop anytime soon.
Via @t1alpha
Relative to non-US stocks, 2025 US stock market returns are on pace for one of the worst years since 2009, and yet the US markets are still hitting all-time highs routinely. Up 10% YTD is a strong year so far. But international markets are blowing the doors off this year. This is why we diversify.
Via Daily Chartbook
Out of the 178 components in Core PCE, there are more components above 3% and below 0% than back in December. We aren’t at the 2022 levels as you can see (and we won’t be), but we’re trending in the wrong direction.
Related: Markets Rally on Fed Pivot Hopes — But Inflation Isn’t Done Yet