Weekly Newsletter: September 8, 2025
“When I’m good, I’m very, very good; when I’m bad, I’m better.” Soon after the release of the much anticipated jobs data, both bonds and stocks rallied. The report itself lent credence to a Fed cut of at least 25 basis points (bp) later this month, but the rally in both asset classes made little sense. Once trading got underway, stocks suffered a modest decline, not fearing a stagnant jobs market and what that might do to corporate earnings down the road. Other data points on the week pointed to some economic weakness, but not yet declining into a recession. The question remains whether interest rate cuts will turn the jobs market around. It had little economic impact a year ago, when rates were cut by 50bp. The jobs report was one of the weakest since Covid and may point to a much smaller overall workforce. The following are a couple of data points that favor a still decent economy. First is labor participation, which has been relatively stable at around 62%. It remains below the 63% rate before the pandemic. If that rate begins to fall off, a recession is much more likely. Second is wage growth, which remains well above a 3% annual rate. This should keep the consumer spending in the months ahead. As long as wages are growing faster than inflation, the consumer should be fine. Finally, the weekly jobless report is still following the jobless data prior to the pandemic, when the economy was doing well. The inflation data due this week could swing the Fed decision. However, the policy laid out by Powell at their Jackson Hole confab indicated that jobs are the primary focus for the Fed.
Getting into the weeds on the jobs report showed a few interesting things, but whether it is enough to move policy remains anyone’s guess. Healthcare was a bit gainer, while the Federal government was a big loser. The service side continues to show decent job gains, with hospitality above year-ago levels. One other note has been the very slow job growth overall since immigration came to a full stop. Whether they are related or merely coincidence, it will take some more months to fully determine the impact of immigration (or lack thereof) on the overall jobs market and the economy as a whole. The coming week keeps the heavy economic data coming, with producer and consumer price indices. Both are likely to remain relatively high as tariff impacts are a feature. Prior reports have shown a willingness to “share the pain” as exporters, importers, and consumers all shared in paying the higher prices. Combined with the employment report, the inflation data will be the determinants of whether the Fed cuts or maintains rates. The obvious betting, based solely on the weaker jobs data, is for a quarter-point cut in two weeks, and additional quarter points at their next two meetings in October and December. Does the “bad” economic news mean “better” interest rates for the new year? Expect plenty of debate in the months ahead.
The various interest rate models are all calling for lower rates. Commodity prices have been moderating over the past few months, which is a key input into longer-dated bonds. The Fed controls short-term interest rates, and those have been gradually declining. When the Fed cut rates last year, interest rates from 10 years and beyond rose as investors feared the Fed was shirking their inflation-fighting portion of its mandate. IF inflation data comes in “hot” next week and is followed by a Fed rate cut, interest rates may surprise many by rising rather than falling for the same reasons as last year.
Even though the stock market fell back a bit on Friday after initially rising, the slow and steady rise in equities in general has put stocks in a precarious position. Momentum models are all signaling a pullback in stocks over the short term. Even though September is historically a poor month for stocks, the SP500 is up slightly so far. There has been some rotation toward the mid and small stocks, but those rotations have been short-lived in the past. IF rate cuts are coming, smaller stocks tend to benefit as they can refinance their own debt more easily. They generally do not have the same access to the capital markets that the large companies do. The recent rally in those stocks is certainly a sign of Wall Street’s embrace of low rates. The biggest question for investors is whether lower rates will be enough to spur economic activity to keep the party going, or if they are indeed too late and a bigger economic slowdown is coming that may create problems for stock investors.
The highlight of the week will be the inflation data mid-week. Is inflation getting “better” or is it stuck at higher levels? The reaction in the bond market will be telling.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.