Labor Day Jobs Edition

Only 8 teams had the cojones to play a real game. Texas/OSU. LSU/Clemson. Nevada/Penn State. Bama/FSU. Kudos to all involved…

Also, I remember when Florida State didn’t have to rush the field after beating the #8 team in the country…

Last Week This Morning

• 10T: 4.23%
• 2T: 3.62%
• SOFR: 4.34%
• Term SOFR: 4.27%
• GDP: 3.3% vs 3.1% expected
• Personal Income: 0.4% as expected
• Personal Spending: 0.5% as expected
• Inflation
  • PCE m/m: 0.2% as expected
  • PCE y/y: 2.6% as expected
  • Core PCE m/m: 0.3% as expected
  • Core PCE y/y: 2.9% as expected

Labor Day Jobs Cements Cut?

Some might argue that CPI will influence the Fed’s decision on September 17^th, but I don’t think so. Consensus NFP is 75k. August has a track record of experiencing significant downward revisions, but who knows with the firing of the BLS head.

Even if Friday’s jobs number (or the corresponding revisions) are surprisingly strong, don’t forget that on September 9^th we get the annual revisions to the April 2024 – March 2025 jobs. Goldman estimates a downward revision of 550k-950k. Anything over 800k would be the biggest downward revision since the GFC.


Even “just” 600k is 50k per month. We averaged 147k jobs gained per month during that timeframe, so 50k would put us sub-100k per month.

You’ve heard me talk about how the Mendoza line is around 75k-100k, meaning that’s the breakeven NFP to keep pace with population growth. At Jackson Hole, Powell noted that immigration policies have significantly lowered that number, but the timeframe being revised was before most of the policy changes took effect.

 Assuming a 600k+ downward revision, Powell & Co. will have all the ammunition they need to cut on September 17^th. “With the benefit of hindsight, and The Real JP’s beating of a dead horse, it is clear that the labor market has not been as strong as we believed…”

Going forward, immigration will have a notable effect on the monthly jobs gained. The Brookings Institution estimates the new breakeven is between 0-40k per month.


The lone (alleged) bright spot in recent jobs reports has been the unemployment rate, which has traded in a tight band for over a year.

But it’s been holding steady for the wrong reasons. People keep giving up looking for work, so they stop being counted. If the labor force participation rate drops for the fourth consecutive month, it could send a false signal of strength about the UR holding steady at 4.2%.

Meanwhile, the unemployed are taking longer to find work.


A nuanced metric the Fed uses to track labor market health is the labor market differential series. It’s the difference between those that say “jobs are plentiful” and those that say “jobs are hard to get.” It just printed at the lowest level since February 2021. In an excellent piece from the SMBC research team, they point out that this implies a 5.2% unemployment rate, not the current 4.2%. With all the noise around tracking job data, is it hard to believe that the government’s stats are just slow to catch up?



Fed Funds – The New Neutral

Markets have an 86% probability of a 25bps cut in two weeks. A weak jobs report cements a cut in two weeks, but it would take a deeply negative number to put 50bps on the table.

If the Fed does cut in two weeks, how will these dots justify their year-end forecast of no cuts?


I’m more focused on the eventual landing spot than whether the Fed cuts in September. It certainly feels like the ultimate neutral rate is higher than it was pre-covid.

Before we go any further, note that the terms r* and natural rate are interchangeable.

You and I care about the neutral rate (not natural). The neutral rate adds inflation on top of those. And people say economists don’t know how to party…

Highly regarded NY Fed President John Williams, working with Liberty Street Economics, published a piece¹ last week that strongly suggests r* is only about 0.25%-0.50% higher than pre-covid. “The global demographic and productivity growth trends that pushed r* down have not reversed.”

Most models, including Williams’ own, put r* at 0.75%-ish.


I agree with him, but I base that on nothing but recency bias and lower rates being better for business. But even if r* hasn’t changed much, keep in mind that it’s only half of the equation for Fed Funds/SOFR. You have to add inflation on top of that to arrive at the neutral rate.

If 2% is the inflation target and everyone at the Fed pinky swear promises we will get there, the back of the envelope calculation for predicting a neutral Fed Funds is simply 0.75% + 2.00% = 2.75%.

Even a state school kid like me can see that if we are in an elevated inflation regime, the neutral rate pushes higher.

• If 2.5% is the new normal for the foreseeable future, 3.25% is the new landing spot
• If 3.0% is the new normal for the foreseeable future, 3.75% is the new landing spot

Core PCE came in at 2.9% so you might be tempted to argue that 3.75% is the new normal, but the Fed will look through this inflation-induced tariff burst.

I’ve been calling for 75bps of cuts all year and I still believe that will be the case. But the Fed will become increasingly cautious as it approaches the unobservable r*.

Once we get to 3.5%-ish, each additional cut will be tougher to justify because it could be pressing on the gas pedal instead of easing off the brakes.

The market has odds of a sub-3% Fed Funds next year at 50%. That’s not because it believes r* will change as much as it is pricing in a recession. If the wheels fall off the economy (notably the jobs market), the Fed will cut below neutral to start pressing on the gas pedal.

Treasury Yields

If you ever get the opportunity to hear a regional Fed economist speak, you absolutely should. They are excellent. I had that opportunity last week and came away with a lot of interesting insights, but my favorite was on the impact deficits have on Treasury yields.

He included a table from various sources indicating that in a vacuum, all agree that a 1% increase in deficits puts upward pressure on yields of about 3-4bps.

That’s not as much fun as all the alarmists screaming about a 7% 10yr Treasury yield, but it feels way more realistic to me. Plus, the CBO estimates that the debt/GDP ratio will worsen 2% per year, up 18% a decade from now.

All else being equal, that implies a T10 that is 0.54% higher than it would be otherwise.


I believe a sub-4% T10 is in the cards, but only because I believe the economy is softening. Remember, I said in a vacuum the T10 will be 0.54% higher than it would otherwise be. But we don’t exist in a vacuum. Print a negative jobs number or watch the UR jump to 4.5% and there will be a flight to safety.

That being said, with the Fed cutting, a steeper yield curve seems likely. Fed Funds will move more lower than the T10. Fed Funds/SOFR in the low to mid-3%’s and a T10 north of 4%.

“Don’t forget China selling Treasurys! We’ve lost our status as the reserve currency!” – fanatical newsletter reader that loves to bring this up at football watch parties.

Well, in June foreign holdings of Treasurys jumped $80B to a record $9.1T.


We are still the world’s mattress and losing that status will take decades, not a year or two.

The Week Ahead

This will be the last week for Fed officials to massage the September 17^th rate cut odds. Remember, once the odds of a decision exceed 60%, the Fed will speak up aggressively if it disagrees. It wants to minimize the market reaction after the decision.

Then all eyes turn to the jobs report on Friday. But before that…

BIRDS BY A MILLION!