Labor market weakening

Treasury yields fell sharply following Friday’s payroll release in a sign that the market expects a cooling labor market will lead to a more accommodative Federal Reserve policy stance.

August’s employment data showed the US added just 22,000 jobs – well below forecasts and a steep decline from the prior month. Furthermore, as prior periods were revised, June’s figures were reduced to a net loss of 13,000 jobs, marking the first negative reading since 2020. While the unemployment rate increased only slightly to a still healthy 4.3%, the overall softening trend is likely enough for policymakers to support a rate cut later this month.

Business activity readings last week in the manufacturing and services sectors were little changed but continue to hover around the separating line between contraction and expansion levels. Tariffs remain a key concern among survey respondents, particularly as it relates to cost pressure and how much of the burden they are willing or able to absorb. One said that, “The intention is not to pass on these [tariff-related] costs, but it’s getting harder as this goes on.”

The weaker labor data may be enough to support a near-term cut regardless of the inflation readings this week. But a hot Consumer Price Index could point to a budding stagflationary environment, potentially complicating the Fed’s policy path over the longer term.