I thought we all made a pact to not overreact to the initial NFP headline?
We have a $1 office NFP pool every month and the best way to win is to simply take the consensus forecast and add 50k-ish. You’ll be right today even if you are proven wrong in two months.
It’s way too nerdy to ever make headlines, but the QCEW (Quarterly Census of Employment and Wages) is considered the highest quality labor data. Unfortunately, quality comes at the expense of timeliness. The March 2024 - December 2024 timeframe was just released and it showed that the economy added just over 700k jobs during that window.
Why does that matter? That is still just a tad below the 1.4mm we thought it was.
And that was after downward revisions nearly every month last year.
So take every monthly number, subtract 50k, and then cut it in half. And then cut it in half again for government hiring.
That’s our big, beautiful private sector job market. Dreamy.
Speaking of steamy dreamy, I’m writing this from Orlando because who doesn’t love central Florida in the middle of the summer? That means you get a mercifully short newsletter this week as I root for whatever outcome gets me home fastest.
Last Week This Morning
Jobs
Thus far in 2025, the average monthly downward revisions to NFP is 50k. In two months, there’s a good chance we learn that we added less than 100k jobs last month. I’ll predictably make a joke about the headlines overreacting.
But if you don’t count government jobs, it was even worse. We only added 74k jobs.
Why then, did rates pop?
Instead of “resilient” to describe the labor market, media types are shifting to some version of “hanging in there”.
I mean, it is a great labor market for all the kids that want to grow up to work for the state and local government. “Government employment rose by 73,000 in June. Employment in state government increased by 47,000.”
Last month was revised up by 11k, taking some of the pressure off Thursday’s report. Then again, we’ve still had downward revisions in 13 of the last 17 NFP reports.
The report continued, “Employment in local government education continued to trend up (+23,000). Job losses continued in federal government (-7,000), where employment is down by 69,000 since reaching a recent peak in January.”
The private sector is not doing nearly as well as state and local government. ADP has a private payroll report it releases on Wednesday ahead of the Friday main event, and it showed private payrolls contracted by 33k last month.
Additionally, firings now exceed hirings. Ignoring a one month plunge for covid, the last time more companies were firing than hiring was 2010. Here’s a graph from SMBC’s eco team showing how the Private NFP Diffusion Index is at worrisome levels.
Other fun facts:
Rates
What does this mean for rates?
The absurd notion the Fed might cut this month is totally off the table. Plus, the knee jerk reaction to the jobs report pulled odds of a September cut down to 70%. I think September is still on the table, but wouldn’t be surprised to see inflation lingering long enough to force the Fed to hold off until November. Then, at least one of the cuts will be 50bps in an effort to “catch up” to where they would like to be.
The recurring theme is that tariffs are preventing the Fed from cutting now, which increases the likelihood of more damage to the economy, which ultimately increases the number and pace of cuts.
Bloomberg’s Ira Jersey and Will Hoffman now expect the Fed to cut to 2.75% by year end 2026. That is crucial to note because it is below most estimates of r*, implying the Fed will be gently pressing on the gas pedal to stimulate the economy, rather than easing off the brakes like last year.
The T10 remains range bound, waiting to take guidance from tariff-induced inflation.
Week Ahead
Light data week as the markets brace for the real first wave of tariff-induced inflation. I still think there’s a good shot we undershoot and the market exhales.