Financial News Highlights
- Financial markets were volatile this week. Bonds and equities sold off at the start of the week only to reverse course later as soft labor market data started to trickle in.
- ISM manufacturing and non-manufacturing indexes moved higher on month, driven by gains in new orders, however, employment subcomponents remained in contractionary territory.
- The job market continued to lose momentum in August, with payrolls gains disappointing and downward revisions to prior months. The unemployment rate also rose to a new cycle high.
Low Hiring, Low Firing… Lower Fed Funds Rate
This was a short but volatile week in financial markets. Earlier in the week, equities and bonds sold off amid growing concerns about the long-term sustainability of government debt in the U.S. and other developed nations. These concerns stemmed from increased borrowing needs and reduced demand for government bonds, particularly from central banks. Long-dated bonds were particularly under pressure, with the gap between 30-year and 10-year Treasuries rising to 0.7 percentage points—the highest since 2021.
In the U.S., fears were amplified by questions around the Federal Reserve’s independence and inflation risks linked to tariffs. Adding to the fiscal alarm was a court ruling that IEEPA tariffs were imposed illegally. The case now heads to the Supreme Court, and if the decision stands, it could jeopardize this revenue stream and leave the government liable for billions in refunds.
However, sentiment reversed on Wednesday, with bond yields falling and equities rising. It was a classic case of “bad news is good news,” as softer-than-expected economic data – namely the lower job openings in the JOLTS report – boosted expectations of more aggressive rate cuts from the Fed. Given last month’s downward payroll revisions and modest job gains, investors were already on alert for signs of ongoing labor market weakness ahead of Friday’s payroll report. They didn’t have to look too hard.
August’s payroll report confirmed that the labor market is softening quite quickly (Chart 1). Job growth was well below expectations in August, with just 22k new jobs added, and has averaged only 29k over the past three months (see commentary). Goods-producing industries, especially those exposed to tariffs, continued to shed jobs for a fourth straight month. Government employment also declined. The services sector added 63k jobs, but gains were not broad-based. Education & health added 46k jobs and 28k were in leisure & hospitality. While employers are not rushing to hire, they aren’t cutting jobs en masse either. Still, the jobless rate edged up to 4.3% from 4.2% the prior month, reaching a new post-pandemic cyclical high.
Playing second fiddle to the payrolls number, the July JOLTS data also surprised with weaker-than-expected job openings, which declined to 7.18 million from 7.36 million. Openings also fell below the number of unemployed for the first time since 2021—though the margin has been narrow since mid-2024 (Chart 2). Quits and layoffs were little changed, suggesting the economy remains in a “low hiring, low firing” state.
Fed officials have recently become more concerned about the downside risks to the labor market, and the August payrolls report shows these concerns are valid. As such, we maintain our view that the Federal Reserve would need to deliver 75 basis points in rate-relief this year, with the first one coming in less than two weeks.
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