A Crack in the Jobs Market Keeps Fed Cuts in Play, Sending Bonds Soaring

Ahead of Friday’s closely watched jobs report, Wall Street traders received a fresh batch of labor market data that painted a picture of continued cooling. The softer numbers kept expectations alive for Federal Reserve rate cuts, pushing bond yields lower. Treasury gains held firm after strong services-sector data, while equities swung between gains and losses and the dollar inched higher.

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“Even the Fed’s most cautious officials will have to acknowledge growing signs of labor-market weakness,” said Will Compernolle of FHN Financial. “If this trend persists, companies could soon cut more positions than they create, tipping overall job growth into negative territory.”

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Money markets are now pricing in about a 90% probability of a Fed rate cut this month, with at least two reductions expected by year-end.

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Jobless Claims and Hiring Data Signal Slowdown

The latest readings added to evidence of waning momentum in hiring:

• Jobless claims rose to their highest level since June.
• Private-sector payrolls grew by just 54,000 in August, according to ADP data, well below forecasts.
• Hiring announcements fell to their weakest August on record, Challenger, Gray & Christmas reported.

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Employers showed little appetite for new hires, and the unemployment rate is projected to edge up to its highest in nearly four years. Economists surveyed by Bloomberg expect just 75,000 new jobs for August, which would mark the fourth consecutive month of sub-100,000 growth the weakest stretch since the early months of the pandemic in 2020.Fed Policy Expectations in Focus

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“The Fed’s free pass on the labor market is officially over,” said Jamie Cox at Harris Financial Group. “The central bank is now more likely to tilt toward rate cuts at its September meeting.”

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Chris Larkin of E*Trade from Morgan Stanley added that the jobs report remains the deciding factor: “So far, this week’s numbers confirm a slowdown. In the short run, markets may welcome weaker data since it boosts the chances of Fed easing. But if conditions deteriorate too sharply, it could spark broader worries about the economy.”

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Eric Teal of Comerica Wealth Management highlighted the potential upside: “The weaker the labor data, the more justification there is for stimulative interest rate cuts. We expect the back half of the year to benefit from easier monetary policy and fiscal measures designed to prevent deeper economic weakness.”

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While labor data signaled softness, separate reports offered some good news on the broader economy. US service providers expanded in August at the fastest pace in six months, driven by the strongest pickup in orders in nearly a year.

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The rebound suggests the largest sector of the US economy is regaining momentum after five straight months of sluggish activity. However, challenges remain, as service firms continue to face elevated materials costs, underscoring persistent inflationary pressures.

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The latest data gives investors a mixed picture: a cooling labor market paired with signs of resilience in services. On one hand, slowing job growth strengthens the case for Fed rate cuts, which could provide markets with a tailwind. On the other, persistent weakness risks undermining confidence in the broader economy.

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Friday’s jobs report will be the real test. If the numbers confirm the slowdown without showing outright contraction, investors may find relief in the Fed’s likely pivot to a more accommodative stance. But if labor conditions deteriorate further, the narrative could quickly shift from optimism about easing to concerns about an economy losing steam.

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