Golden — Rate-cut hopefuls received their golden opportunity on Friday, when the August jobs report disappointed. The Bureau of Labor Statistics reported job gains of a paltry 22k, well short of the market’s 75k expectation. Job gains were concentrated in health care, leisure, and hospitality, while manufacturing, goods-producing, construction, financial/professional services, federal government, and temporary-help sectors saw declines. Private payrolls printed low as well, adding just 38k jobs, down from the 75k expected. The unemployment rate also ticked up to 4.3% for the first time since 2021. Data revisions were mixed. Yet employment declined in June, marking the first payroll deduction since 2020. All told, this latest jobs report was a big disappointment.
It was also worse than the headlines suggested. One- and three-month labor diffusion indices are at the 50/50 mark now, indicating that employment gains/declines are roughly balanced in the short-term. However, the longer-term trend—using the six-month diffusion index (Figure 1)—is only at the 48 level, and is showing signs of accelerating downward.
It’s no coincidence that the current downshift in the labor market began with an aggressive tightening cycle from the Federal Reserve (responding to high inflation) which began in early 2022. The argument could be made that the dye had been cast years ago when the federal funds rate spiked from 0.25% to 5.50% in 1.5 years’ time. It has since taken some two years for that tightening to work its way into the headline data.
Late-stage labor market deceleration is, of course, the norm for mature economic expansions. Figure 2 shows how headline job gains tend to grow at a slower pace in the final third of expansions, with outright declines occurring in recessions. The declines, furthermore, tend to begin slowly and pick up pace as recessions take root.
Figure 3 illustrates the job-growth pattern over America’s previous three recessions—in 2001, 2008, and 2020 (in the latter, the magnitude of change was skewed by government shutdowns during the pandemic).
Figure 4 shows the gradual slowdown in job creation as the Fed tightened monetary policy in 2022. This slowdown makes sense intuitively, too: After years of economic prosperity, hiring the next employee becomes less profitable at the margin. We expect this trend to continue.
The slowdown in the labor market is not isolated to the BLS data. The Job Openings and Labor Turnover Survey (JOLTS), released last week, told a similar story. Job openings in July hit their lowest level in 10 months. Similarly, quit rates reached a new plateau at around 2%, down from their post-pandemic peak of 3%.
For context, quit rates tend to rise in prosperous times, as more opportunities for workers present themselves—and vice versa in difficult times. As Gregory Faranello, head of U.S. rates trading and strategy at AmeriVet Securities, put it: “The job market has weakened and the transition between public to private sector job growth will require lower rates. The Fed will begin to lower rates this month and we expect a string of more cuts along the way.”
It is now clear that the risks to both sides of the Fed’s dual mandate are more in balance. The labor market is clearly downshifting, in line with historical norms, and inflationary pressures are declining, but are still elevated relative to the 2% target.
The Federal Open Market Committee (FOMC) will gain one last glimpse into inflation trends via the Consumer Price Index report this week. Yet federal funds rate futures are now 100% certain that a cut of 25 basis points will be delivered at the FOMC meeting on September 16-17, with some potential for an even larger move.
To paraphrase the heroes of the Netflix worldwide sensation KPop Demon Hunters, the odds and amount of rate cuts are “goin’ up, up, up.” That’s why rate-cut hopefuls are “gonna be golden.”
FROM THE DESK
Agency CMBS — There were no major changes in our market, week over week. Municipals — AAA tax-exempt yields were lower throughout the yield curve, especially on the long end of the curve, week over week. The municipal market took a breather in August—though over $52 billion of new issuance did price during the month—as the market saw issuance volume decrease by approximately 5% compared to August 2024. Last week saw just over $7 billion price. The multi-family housing sector was also relatively quiet, with just two deals pricing. Municipal bond funds saw a third straight week of inflows, with $672 million entering (YTD inflows of $13.82 billion), while high-yield funds saw inflows of $238 million.
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