At least one guy was happy about Friday’s job report…
Last Week This Morning
- 10T: 4.07%
- 2T: 3.51%
- SOFR: 4.41%
- Term SOFR: 4.22%
- JOLTs Job Openings: 7181k vs 7380k
- Non Farm Payrolls: 22k vs 75k expected
- Unemployment Rate: 4.3% as expected, up from 4.2% last month
- Clemson was this close to being the target of my sarcastic barbs this week
Those Jobs Tho!
A second revision to June’s job report means we actually LOST 13k jobs. The original report showed a gain of 147k, so I went back and grabbed some headlines
from July 3rd.
The T10 jumped 10bps because of course the labor market is crushing it, right!
Here was the opening line of the newsletter after that report: “I thought we all made a pact to not overreact to the initial NFP headline?”
I continued, “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.”
Welp…I was wrong. After two months, the 147k wasn’t just revised down 50k. It was revised down 160k. That’s right, we lost 13k jobs in June. What would the headlines have looked like had that been the headline originally?
Whoops, how did that get in there?
Would the Fed have cut in July if it had been faced with a -13k NFP? I think so.
In that newsletter, I also noted that, “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.”
But as Michelle in San Diego recently pointed out to me, the federal government hiring freeze is also really impacting recent college grads, which in turn impacts the rental market. True to form, Friday’s report revealed a 16k loss in government hiring. Considering government hiring has been making up 50% of all hiring over the last year, the labor market should continue to weaken.
But wait, there’s more! Longtime readers will know I usually break out government as well as healthcare. If we exclude healthcare, we’ve lost 142k jobs over the last four months. That’s an average loss of 36k per month!
One more thing…Tuesday brings the annual benchmark revision to the NFP gains April 2024 – March 2025. Goldman estimates a downward revision of 500k-1mm. That period saw average monthly gains of 147k, so it’s very likely that will be revised sub-100k.
With the benefit of hindsight, the labor market has been cooling much faster than the Fed thought.
On a long enough timeline, I am always right!
Other Fun Facts from Friday’s Report
- The negative June print ended 53 consecutive months of job gains, the second longest in history (post-GFC)
- Full time positions declined by 357k
- Part time positions increased by 597k
- Annualized job growth is just 0.5% - recession levels
- Average hourly earnings dropped 0.2% (good for inflation)
- UT is just the Texas version of Penn State
- Birth/Death adjustments added 90k to the headline number…which means it could have been much lower
- The unemployment rate increased to 4.3%, the highest in four years
- Me and Jerry Jones have the same number of NFC Championship appearances since I graduated high school
- If the headline 22k gain holds up, there is a chance it’s not as bad as it would have been a year ago. Immigration policies are likely lowering the monthly NFP breakeven to somewhere between 0-40k
- Job openings are back to late 2020 levels, but heading in a different direction this time
What Does This Mean for the Fed?
The Fed is definitely cutting rates 25bps next week, but not 50bps. That would spook the long end of the curve.
I don’t care how many economists try telling me that the CPI print this week will dictate the rate cut decision, it won’t. Yes, they all have fancy degrees and Ivy League pedigree and actual training in these sorts of things, but I am telling you they are cutting even if the CPI comes in hot. Like my old boss once said, “If they were better at their jobs, they’d be traders.” (the economists at Wachovia didn’t love him…)
Monetary policy impacts demand side inflation. Tariffs are supply side. I made the same argument about supply chain disruptions post-covid. “How do higher rates wave in container ships to LA ports?” The Fed knows this and they will expend energy trying to educate us.
They will say not only is inflation transitory temporary, but higher rates don’t help with supply-side inflation (tariffs) anyway.
But as evidenced by the last three years, higher rates absolutely influence the labor market. Do you honestly believe it’s a coincidence that we’ve seen NFP fall from 550k to 35k since the first hike? “But inflation has been above the Fed’s target for almost five years!”
Sure, but it’s been below 3% for almost two years. Should 2.5% be treated the same as 5.5%?
Plus, everyone’s an inflation tough guy until family and friends start losing jobs.
Here’s how the Fed is thinking about cuts right now:
- at today’s levels, a few rate cuts are still easing off the brakes.
- as we approach 3.5%, we start approaching market measures of “neutral”. The Fed will become more cautious as they approach 3.5%. They don’t want to inadvertently start pressing on the gas pedal.
- if we go below 3%, the Fed is pressing on the gas pedal. Something has gone wrong
If we are already behind the curve, the Fed may need to cut rates more than expected. If we don’t get off the brakes ASAP, it might be too late.
Friday’s report pushed year end 2026 forward curve below 3%, so the market is already pricing in the need for the Fed to press on the gas pedal by the end of next year.
But if future months see continued weakness in the labor data, the Fed will push us towards 3% faster in hopes of putting a floor in the job market. And pressing on the gas pedal (sub-3%) will enter the convo.
10 Year Treasury
The T10 is back to 2025 lows. A cut next week does not imply the T10 will go lower - that’s already priced in.
Rather, the tension between economic cooling vs inflation will dictate movements. Last week, we saw that labor market weakness took the steering wheel.
I said earlier that the CPI report won’t impact the Fed decision, but I do think it could influence 5 and 10 Year Treasurys. It’s expected to come in at 2.9%, which is already priced into fixed rate yields. But if it comes in with a 3-handle, we could see rates pop.
I continue to believe the only way the T10 drives materially below 4% is a significant economic weakening.
If you are holding off on fixing a rate because you think the Fed is going to cut, you could be disappointed.
If you are holding off on fixing a rate because you think the labor market wheels are going to fall off, the Fed will cut to 2%, and there will be a flight to safety, then I can respect that view even if it’s a gamble.
The Week Ahead
Inflation all week long and the big revision to the NFP numbers on Tuesday.
