Short and intermediate maturity Treasury yields have been on a downward trajectory since the end of July as both market participants and officials at the Federal Reserve are growing increasingly concerned about the full employment portion of the Federal Reserve’s ‘dual mandate’ and less focused on the stable prices component. This morning’s payrolls report further solidified the risks to the full employment objective with job growth coming in at 22k, below the consensus expectation of 75k. Notably, the three-month moving average is only 29k, well below the six-month moving average of 67k and materially weaker than the three-month moving average as of December 2024 of 209k. Given the change in immigration policy of the new administration and downsizing of the federal government, a slowdown in the payrolls report over the course of 2025 was expected, but the current rate of change in job growth is more destructive than the change in immigration policy would imply in the Chandler team’s view. On the positive side, the overall unemployment rate remains low at 4.3%, increasing by only 0.10% on a month-over-month basis. Average hourly earnings were 0.3% for the month and 3.7% year-over-year, marginally above the 3.0% to 3.5% annualized wage growth range consistent with inflation close to the Federal Reserve’s 2% policy objective.
The ADP Employment report was released on Thursday, coming in at 54k for the month of August, marginally below the consensus estimate of 68k. The underlying softening trends of the ADP report are similar to the payrolls report, with a current three-month moving average of 46k compared to the three-month moving average of 200k as of December 2024. The compensation component of the ADP report points to a stable labor market, with the annual wage growth for Job Stayers current at 4.4% compared to 4.6% as of December 2024, and Job Changers having annual wage growth of 7.1% compared to 6.9% as of year-end. Weekly jobless claims also remain within the recent range, coming in at 237k for the week ended August 30th, with continuing claims remaining more elevated compared to historical norms at 1,940k as of August 23rd, indicating a more challenging labor market for those who no longer have a job. The Job Openings and Labor Turnover Survey (JOLTS) was released on Wednesday and showed a continued deterioration in the Job Openings rate of 4.3% as of July 2025, consistent with the continuing jobless claims data indicating a less robust job market.
The market also digested two important monthly survey-based data releases with mixed results, the ISM Manufacturing and the ISM Services Indices. The manufacturing index remains marginally in contractionary territory, coming in at 48.7 compared to the prior months’ 48.0, however in a positive sign the new orders component ticked up into the expansionary zone at 51.4 compared to the prior months 47.1. The services index was more constructive at the headline level, coming in at 52.0 compared to the prior months at 50.1, and similar to the manufacturing index the new orders component surprised to the upside at 56.0 compared to the prior month’s 50.3.
The economic calendar next week includes updates on the NY Fed’s one year inflation expectations, consumer credit, PPI, CPI, and the preliminary benchmark revisions to the employment report. The consensus estimates for both the PPI and CPI reports point to trends in the annualized inflation numbers that are higher for PPI and more or less unchanged for CPI (August 2024 versus August 2025), and well above 2.0%, complicating the ability of the Federal Reserve to aggressively adjust monetary policy settings despite the softening labor market. In our view, policymakers at the Federal Reserve will remain cognizant of the dual mandate and we continue to expect a 25-basis point reduction in the Fed Funds rate at the September 17th meeting with another 25 basis points in the fourth quarter of 2025. Given the current inflation trends and the yet to be fully felt impact of tariffs on inflation readings, a more material deterioration in the labor market will be required to bring about a more aggressive monetary policy response from the Federal Reserve in our view. Given the totality of the data released thus far, and the Chandler team’s outlook for the balance of the year, we continue to forecast positive but below trend GDP growth and a range bound market for risk assets.
Next week: NY Fed 1yr Inflation Expectations, Consumer Credit, PPI, CPI, Jobless Claims, Federal Budget Balance, and University of Michigan sentiment indicators.
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