Wall Street traders gearing up for Friday’s jobs report got a trio of data that reinforced the view of a cooling labor market, keeping bets on Federal Reserve rate cuts alive while driving stocks and bonds higher.
The latest readings on hiring and unemployment claims came on the eve of what economists expect to mark the weakest stretch of US job growth since the pandemic. Treasury two-year yields dropped toward the lowest in almost a year. The S&P 500 saw a back-to-back advance. Money markets priced in a roughly 90% chance of a Fed cut this month and at least two by year-end.
Employers in the US showed little enthusiasm to take on workers during August, and the unemployment rate probably ticked up to an almost four-year high, adding to evidence of a more subdued labor market.
After lowering rates by a full percentage point last fall, Fed policymakers have held them steady this year out of concern that tariffs could reignite price pressures. But as risks to the labor market become more apparent, officials are widely expected to resume rate cuts.
“The Federal Reserve’s free pass on the labor market has ended,” said Jamie Cox at Harris Financial Group. “You can expect the Fed to tilt its balance of risks to cut rates in September.”
A traders positioned for the key jobs reading, they kept a close eye on Capitol Hill. Stephen Miran, who’s President Donald Trump’s pick to fill a vacant seat on the Fed’s Board, reiterated his commitment to central bank independence at a confirmation hearing Thursday.
In the run-up to the report, data showed US jobless claims rose to the highest since June. Private-sector payrolls increased by 54,000, according to ADP Research data, trailing estimates. Hiring plans fell to the weakest level for any August on record, according to Challenger, Gray & Christmas.
“Even the most easing-skeptical officials should concede increasing risks of labor market weakness,” said Will Compernolle at FHN Financial. “If this momentum continues into upcoming months, firms would soon be shedding workers faster than hiring them to the point of negative job growth.”
Nonfarm payrolls probably grew 75,000 in August, according to the median estimate in a Bloomberg survey of economists, which would mark a fourth straight month of job growth below 100,000. The unemployment rate is seen rising to 4.3% — the highest level since 2021.
Tomorrow’s jobs report will be the deciding factor, but so far this week the data is confirming a slowdown in the labor market, according to Chris Larkin at E*Trade from Morgan Stanley.
“In the short term, markets may embrace that data because it should increase the odds of Fed rate cuts,” he said. “But if the numbers deteriorate too much, it could raise concerns about the health of the economy.”
The silver-lining is the weaker the jobs data the more cover there is for stimulative interest rate cuts that are on the horizon, according to Eric Teal at Comerica Wealth Management.
“The boost in the latter half of this year should come from easier monetary policy and stimulative fiscal policies to avoid further economic deterioration,” he said.
A survey conducted by 22V Research showed that investor focus has dramatically shifted to payrolls after the weak number and large revisions last month.
According to the tally, 36% of respondents think the reaction to Friday’s data will be “risk-off,” 35% said “mixed/ negligible” and 29% “risk-on.”
“The most relevant question for the August payrolls report is: did June see the bottoming for job creation or is there still further downside yet to be realized?” said Vail Hartman at BMO Capital Markets.
Hartman says this won’t be the deciding factor behind whether the Fed cuts by 25 basis points in September, but it will influence the degree to which the Fed’s economic projections lay the groundwork for cuts over the balance of 2025.
“In the event that Friday’s data shows an improvement from the recent lull in hiring, then the Fed would have grounds for a patient approach to rate cuts over the balance of the year,” he said.
The Fed has kept rates unchanged in 2025, largely due to concerns tariffs could stoke inflation. But lackluster employment figures have prompted greater concern, and Fed Chair Jerome Powell recently signaled a cut could be warranted amid a “shifting balance of risks.”
Separate data Thursday showed activity at US service providers expanded in August at the fastest pace in six months on the sharpest acceleration in orders in nearly a year.
The solid advance in those demand indicators suggests the largest part of the economy is gaining some traction after five straight months of sluggishness. Twelve services industries expanded last month, led by information, wholesale trade and arts and entertainment. Activity contracted in four industries.
“Overall, the data showed a solid rebound in business activity among service providers despite there being some pockets of weakness within the details of the report,” said Hartman at BMO. “From here, the path has been cleared to set up for tomorrow’s payrolls report.”
‘Over Time’
Fed Bank of New York President John Williams said his forecast is that it will “become appropriate” to cut interest rates “over time,” without clarifying the timing or pace of such moves.
Meantime, the US Justice Department opened a criminal investigation into whether Fed Governor Lisa Cook committed mortgage fraud — ratcheting up pressure as President Donald Trump seeks to oust her from the central bank.
Federal prosecutors have issued subpoenas seeking information related to allegations that Cook misrepresented information on mortgage applications, according to people familiar with the matter, who asked not to be identified discussing the ongoing probe.
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