This week is going to deliver fireworks

Outlook

This week is going to deliver fireworks. Today is the French vote of no-confidence. Tomorrow it’s the BLS “benchmark” revision of labor market data. The revision last year subtracted 818,000 jobs. The revision is to correct for sampling and modelling errors. A recent Reuters story estimated another 800k downward revision.

Then we get US PPI (Wednesday) and CPI (Thursday), which should put a dent in expectations of rate cuts, even if September is a done deal. Off on the side, we do the rollover in FX futures from Sept to Dec and while futures are a small part of overall trading, the rollover has an outsized effect on spot as traders unload short dollar positions and have to buy dollars.

The big news of the week was not the lousy jobs numbers—three of them in a row—but rather the response of the 10-year. It fell from 4.49% in mid-July to 4.30% on Sept 2 to 4.091% at the close on Friday. Other shorter-tenor paper also fell. The 2-year fell from 3.60% to 3.48%. Meanwhile, the 20-year (4.938 to 4.702% on the 4-day week) and 30-year (4.982% to 4.76%) also went down.

What happened to the so-called bear steepening?

We don’t pretend to understand the bond market but at a guess, the inflation-obsessed bond vigilantes are giving way to the crowd that says “Recession is coming! Recession is coming.”

The vigilantes may be back. This week we get PPI and CPI as well as auctions of

3-years, 10-years and 30-years, of which only the 3-years are new. The others are re-openings and to the bond cognoscenti, that makes it different. With the return falling, will the foreigners still show up?

So, does the jobs data really justify all this misery? Jared Bernstein says monthly payroll gains were 168,000/month in 2024 and Trump is getting less than half that at 75,000/month so far this year, and worse, “decelerating to a paltry 29,000 over the past three months.” Also, underemployment (as measured by the U6, hit 8.1% in August, the highest since late ‘21. “The Black rate—6.1% in our last month in office—just hit 7.5%, up sharply and quickly by 1.5 points from May of this year.”

Economists are not united on whether the jobs information does justify the angst. Maybe the bond market overreacted. The stock market wasn’t happy, either. And all this data gets revised. The problem with that is Trump being in charge of the BLS now, so its data no longer to be trusted. That leaves us with the private sectors estimates.

Some say, and we concur, that labor is the victim of the Trump tariffs that have sowed uncertainty among those who do the hiring.  Not only do they have rising costs in imported goods, they can’t hire labor at a price that leaves them with the profits they seek. We have a ton of evidence of businesses now deprived of illegal immigrant labor they can underpay—landscapers, roofers, home builders, and many others. As with the fruit and vegetable crop harvesting, we have plenty of evidence these are not jobs Americans will take, not at the wages offered and maybe not even at any wage. 

So, yes, the chain effect from tariffs (and anti-immigrant initiatives) is causing a labor problem. Then there’s AI, but we can’t find solid evidence of how many jobs it’s taking away. Judging from some companies, it’s substantial.  In early 2025, AI-driven layoffs were listed at 10,000. Goldman had said in 2023 it would be 300 million. The World Economic Forum has 92 million by 2030.

What if Trump chickens out and removed most of the tariffs, at least the giant ones? It would almost certainly help the labor market, but that would leave the immigration raids and the AI, so not all. Besides, tariffs are his middle name and as the economy contracts, he will get the rate cuts he so desperately seeks.

What is the threat of recession? As usual we get a panoply of answers. American banks are still at under 50%, but UBS shocked last week with 93% probability of a recession due to the budget deficit and other wrongs. Moody’s chief economist Zandi says “The economy is on the edge of recession: In fact, we may already be in one. As more revisions come in, it will probably show that employment is declining in a consistent way.” An Australian economist puts it at 50-50.

A scan across the forecasts delivers Deloitte with 1.4% for Q3. The Philly Fed survey of economists gets 1.3%. Goldman has 1.6%. The NY Fed has 2.1% and we get a fresh one today. The St. Louis Fed has 0.5690% q/q at an annual rate. The others are (we think) year-over-year. These are all pre-payrolls except the St. Louis Fed , which was published on Friday.

The important thing is whether any of this, if validated in the next set of releases, deliver expectations of 50 bp in Sept or another cut in October.  Let’s not forget the feedback loop (Soros!) that tells us expectation of a slowdown/stagflation/recession is validated by the rate cuts and actually worsen the situation (until the true bottom is in).

For what it’s worth, the CME FedWatch tool has a probability of another cut in Oct at 71% as of noon on Sunday. That means a 50 bp cut from today’s 4.25-4.5%. The probability of the Sept 25 bp cut had already reached 90% with only 11% expecting 50%. We say it should be a bigger number expecting 50% in Sept, inflation reports this week notwithstanding. 

The stock market just loves rate cuts. The stock market just hates recession.

The US economy is beset with problems, some of them unforced errors. We have a pending Supreme Court decision on tariffs. A case against a Fed official that could lead to Trump controlling the Fed. A dreadful budget and the need for a continuing resolution so the government avoids another shut-down. We have the bigot-in-chief deporting brown people to third country prisons and the military blowing up boats that it does not know for sure are drug traffickers.

One strange Trump-favorable outcome—the hundreds of S. Koreans working at a S. Korean company in Georgia really were illegal and S. Korea is sending a plane for them. Trump finally said something smart—we need to import experts to train US citizens to do those jobs. (Well, train the locals. In years past, the qualified would have moved to Atlanta for those jobs. US labor mobility has dropped severely. Blame housing costs, maybe.)

Forecast

The dollar “should” fall like a rock on expectations of another jumbo rate cut of 50 bp, although the Fed funds bettors don’t see it… yet. 

The bond market seems to be saying recession is looming. Most economists are not on board yet but keep your ears open for new recession chatter this week. It’s hard to imagine a 50 bp rate cut at the Sept Fed meeting next week when are getting inflation numbers this week that should put the brakes on that. But we had 50 bp last Sept when recession was a word on everyone’s lips. History may repeat.

The 25 bp is baked in the cake and the only question is whether it’s already fully priced in.  It’s not inconceivable that another BLS benchmark revision by some 800,000 jobs would be seen as justifying 50 bp.

The excellent Authers writes “At this point, only a shockingly bad inflation number on Thursday could possibly avert a cut. The current consensus forecast, according to Bloomberg, calls for core CPI of 3.1%, so traders assume — probably correctly — that the Fed will ease even if inflation stays this high.”

Tidbit: We don’t follow the Chinese government setting the exchange rate every day, but this time reports say the fix is the lowest since Nov 2024.

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