The labor market is slowing down. Evidence comes in the form of August payrolls, which grew by 22,000. The unemployment rate rose to 4.3%. The bond market rallied as a reaction. And the 10-year Treasury fell to 4.07%. This is almost a 26-basis-point decline in yields from their highs in August. The four-month average payroll growth has been closer to 27,000. This is a stark difference from the averages of 168,000 additions in 2024 and 216,000 in 2023.
The weakness in the labor market is seen across different data sets. Continuing unemployment claims are elevated, even though jobless claims are low. This merely suggests stagnancy in the workforce. Deportation and stricter immigration policies will continue to result in a significant slowdown in jobs. The administration has a deportation goal of 3,000 people per day, aiming toward 1,000,000 deportations in 2025. The hiring rate — the ratio of new hires to the number of workers — has been at its lowest since 2020. The quits rate is also lower than pre-pandemic.
The labor market is so important because it is one of the Fed's two mandates (the other being inflation).
According to different sources, the probability of an interest rate cut of around 25 basis points is between 86% and nearly 100%. At Jackson Hole, Powell signaled an amenability to softer data-driven rate cuts. The payroll numbers confirm the rate cut for next week. However, we do not think the FOMC is ready for a 50-basis-point cut for September.
This is a crucial data release week since we will get August CPI numbers. The market expectation is that August CPI will rise by 0.2% headline and 0.3% core. This brings us to the second mandate of the Federal Reserve: 2% inflation. Core Personal Consumption Expenditure (PCE), our inflation measure, is 2.9% for July. The market has become comfortable with this. As tariff costs seep into the economy via companies and consumers, inflation will undoubtedly stay higher than 2%.
Below is a snapshot of the Bloomberg market survey of GDP forecast, Consumer Spending, PCE YOY%, Core PCE, and unemployment. In summary, it shows a slowdown in the economy with regards to GDP and somewhat elevated unemployment. But remember, forecasts are not set in stone.
CHANGES IN RATES
The Treasury market rallied last week. The 2/10-year spread ended the week at 56 basis points.
The municipal market rallied similarly to the Treasury market. The 2/10-year spread in the muni market widened to 0.99%.
Treasury-muni ratios decreased throughout the week.
Investment grade corporate bond yields moved slightly lower week over week.
While President Trump will be vindicated in his criticism of the Bureau of Labor Statistics, economists expect U.S. job growth to be revised significantly lower for March payrolls.
On a personal note, the Trump family has added $1.3 billion to their net worth through their crypto ventures. According to the Billionaires Index, their fortune now stands at $7.7 billion.
Meanwhile, Secretary Bessent appeared on NBC’s “Meet the Press” to talk about the Trump administration’s appeal to the Supreme Court to overturn a decision ruling many tariffs illegal. Bessent indicated that in the case of an adverse ruling, the government would have to refund half of the tariffs. The administration has a backup plan that could keep the tariffs in place. According to the White House, the U.S. has collected about $158 billion in total tariff revenue. Returning that revenue will not be easy administratively or for the U.S. deficit.
The 5-year Breakeven Inflation Rate finished the week of Sept. 5 at 2.42%, 5 basis points lower than the previous week. The 10-year Breakeven Inflation Rate finished the period at 2.37%, 4 basis points lower than the observation from last week.
The 10-year quality credit spread between BBB revenue less AAA general obligation bonds for last week was at 0.87% versus a historical average of 1.68% demonstrating very healthy and tight spread metrics.
Investment grade spreads are extremely tight at 0.78%, compared to a historical average of 1.11%. The high yield spread is lower at 2.66%, compared to a historical average of 4.6%. We believe that both these markets are overpriced on a spread basis.
Money Market Flows (millions of dollars)
Money market fund flows were much higher week over week.
Mutual Fund Flows (millions of dollars)
All asset classes except municipals experienced net outflows week-over-week.
ETF Fund Flows (millions of dollars)
ETF asset classes saw a net decrease in flows over the week.
This week’s tax-exempt market is at $9.7 billion, which is a good-sized calendar for the market. This is against $19 billion in reinvestment capital hitting September.
The weakness in the job market is evident. Last week we saw an anemic jobs growth number and a rise in unemployment. The weak numbers cement the 25-basis-point rate cut for next week. An economist survey shows a weakening economy. A negative ruling from the Supreme Court on tariffs could cause an extremely messy administrative situation.
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