6/6/25: Labor Market Shows Strain, Fed Cuts Still on Horizon

With the ever-constant tariff policy news as a backdrop, investors turned their attention to a robust amount of employment data released this week. Job growth moderated in May with nonfarm payrolls increasing 139,000, above the consensus estimate of 126,000, however, the prior two months were revised down by a combined 95,000. The unemployment rate was unchanged at 4.2%, the underemployment remained at 7.8%, and the labor force participation rate declined to a three month low of 62.4%. Earlier in the week, the Job Openings and Labor Turnover Survey (JOLTS) unexpectantly rose in April to 7.39 million but the details of the report reflected underlying labor-market weakness. Layoffs increased and the quits rate dropped, indicating workers found it harder to get new jobs. The ratio of vacancies to unemployed workers moved up slightly to 1.03, from 1.01 in March. The ADP National Employment Report released on Wednesday showed hiring decelerating to the slowest pace in two years. Private-sector payrolls increased by only 37,000 vs. survey expectations of 114,000. Despite the slowdown, pay gains remained strong, with workers who changed jobs seeing a 7% pay increase and individuals who remained with their current employer seeing a 4.5% gain. Initial jobless claims rose to the highest level since October, increasing to 247,000, and pushed the four-week moving average up to 235,000. Continuing claims declined slightly to 1.9 million in the week ending May 24.

Other economic indicators this week reflected contraction in both the services and manufacturing sectors. The Institute of Supply Management (ISM) index of services dropped 1.7 points in May to 49.9, a reading below 50 indicates contraction. The drop was primarily due to lower business demand and a significant drop in new orders. The ISM Manufacturing index contracted for the third consecutive month, dropping to 48.5. Notably, the report reflected a 16-year low in imports and the gauge of exports fell to the lowest level in 5 years.

After the release of the better than expected employment report on Friday, treasury yields moved higher this week. As of this morning, the 2-year note is trading at 4.04%, the 5-year note at 4.12%, and the 10-year yield at 4.49%.

Although the Chandler team does not expect the Fed to lower rates at their upcoming meeting on June 18^th, we do believe the Fed will move forward with rate reductions later this year. As always, we will continue to monitor the markets and adjust portfolios as needed to further manage risk and support long-term investment goals.

Next week:  Consumer Price Index (CPI), Producer Price Index (PPI), Jobless Claims, Household Change in Net worth, University of Michigan Sentiment.

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