GM. This is Milk Road Macro, the newsletter that’s more dialed into the Fed than your grandma is into Facebook drama.
Here’s what we got for you today:
- ✍️ Should we be worried about a weakening US labor market?
- 🎙️ The Milk Road Macro Show: How Inflation and Unemployment Are Cornering the Fed w/ Samim Ghamami
- 🍪 Gold continues to soar to new highs
Prices as of 8:00 AM ET.
SHOULD WE BE WORRIED ABOUT A WEAKENING U.S. LABOR MARKET?
New US payroll data was released last week - and it was pretty bad.
Stock indices and bitcoin tumbled on the news.
And now the odds of big Federal Reserve action this month are rising.
So, what happened with the payroll report?
Is the US employment situation really as bad as it seems?
Will we see a jumbo 50bps Fed rate cut in September?
And what does it all mean for risk asset markets?
Let’s take a look…
So, what happened with the payroll report?
Last month, we saw a concerning US payroll report that rocked markets.
And it was followed by bad news this month.
Payrolls (jobs created) in August came in at a very low 22,000, well below estimates of 75,000.
And there were also revisions to previous months - with June payrolls falling to -13,000, the first negative month in years.
There is no question about it - job growth in the US has slowed considerably.
Looking deeper in the data, things just get worse.
Over the past three months, a large majority of all job growth in the US came from just one segment - private education and healthcare.
Is the US jobs market and employment picture concerning?
On the face of it, this new data looks concerning - and it looks like a growth slowdown.
But one thing to bear in mind with US jobs numbers currently is that immigration levels have been falling off a cliff this year.
This is due to the Trump administration’s clampdown.
And so the population growth picture in the US is shifting dramatically (and might actually be negative currently).
As a result of this, many analysts believe the “breakeven” job growth rate is now a lot lower than it once was - and a healthy US economy might only need to create very few or even no new jobs.
There are also other potential considerations, including a hangover from tariff uncertainty earlier in the year, and the potential ongoing disruptive effects of AI.
Despite the poor jobs growth, the unemployment rate came in at 4.3%, in line with forecasts, and is still low based on historical standards.
Although it has been grinding higher over the past two and a half years.
Additionally, Initial Jobless Claims (the number of people claiming for unemployment benefits for the first time) have remained in a narrow range for years.
This is incredibly low compared with historical standards.
While the jobs report might be concerning - my general opinion is that the labor market is cooling, not collapsing.
Nothing is looking particularly recessionary to me currently - and that is the most important thing from a risk asset market perspective.
So, this payroll report was less about the economy, and more about how the Federal Reserve will respond…
Will the Fed go 50bps?
At least a 25bps rate cut from the Federal Reserve is surely locked in for September 17 at this point.
Now, the narrative is shifting towards: will they go 25bps or 50bps?
Interest rate traders are currently pricing an 88% chance of a 25bps cut and a 12% chance of a 50bps cut (at the time of writing).
Odds of a 50bps cut are higher on Polymarket - sitting at 19% (at the time of writing).
It’s all becoming eerily similar to last year.
Jobs data started weakening around July and August in 2024, forcing the Fed to start cutting rates, beginning with a jumbo 50bps cut in September 2024.
One other thing to note is that, around the time this newsletter goes live, we will see the release of the BLS Annual Benchmark Revision for payrolls.
This is when previous payroll numbers are revised, sometimes heavily.
Last year, around this time of the year, we saw a big negative revision to jobs data (-818k) which added to pressure on the Fed to cut 50bps.
Some people are expecting a similar situation to occur again this year, so the 50bps train might really get chugging once we see this new revisions data.
What does it all mean for risk markets?
After the bad payroll report, risk asset markets dipped when markets opened on Friday.
But have since largely reversed the losses (at the time of writing).
Rate cuts are now almost certainly happening.
So the next question to ask is - will there be a recession or not?
In the absence of a recession, rate cuts are bullish for risk assets historically.
I have been saying it for weeks and weeks now - there is little sign of a recession on the horizon, from my point of view.
Here are a few charts.
Growth nowcasts (showing a real-time estimate of GDP growth in the US) still look resilient.
This isn’t recessionary.
It’s a similar picture for the Citi Economic Surprise Index (showing whether a wide range of economic data is coming in above or below expectations), which has been rising.
This isn’t recessionary.
And we also just had a banger of an earnings season for S&P 500 companies in Q2, with big positive earnings surprises across almost all categories.
The best earnings season since 2021 by many measures - no signs of a slowdown here.
This isn’t recessionary.
And the outlook for upcoming quarters is also looking good.
S&P 500 earnings revision breadth (how many analysts are raising their earnings forecasts vs. cutting them) is shooting higher (orange line).
You simply don’t see this when there is a recession on the horizon.
2024 redux?
So, is it just 2024 all over again?
The Fed holds out on cutting rates, gets spooked by weakening job numbers over the summer, and then urgently starts slashing rates into a reaccelerating economy?
Run it back? (Maybe?)
If we are about to see a repeat, here’s the analog:
Risk asset markets were rocked by weakening payroll and employment data throughout the summer of 2024.
This culminated on Friday September 6, 2024 after a bad payroll print - and that day marked the exact bottom for risk assets before they ripped higher through the rest of the year as Fed rate cuts began.
Wrapping up
Job growth in the US has been slowing and continues to slow - there’s no doubt about that.
But there are plausible reasons as to why this is occurring - including immigration levels, tariff concerns and AI disruption.
Other measures of US economic health are still looking relatively healthy.
The Federal Reserve is now almost certain to restart rate cuts in September, and might even begin with a jumbo 50bps cut.
If the economy remains resilient, rate cuts are bullish for risk assets - and that is currently still my base case.
That’s it for this edition - catch you in the next one.
THE FED’S NO-WIN DILEMMA IS HERE 🚨
In today’s episode, Samim digs into the structural cracks forming beneath the surface, and why a cooling labor market might just be the start of something bigger.
Here’s what you’ll hear:
- Why August’s negative jobs print is more than just a data blip
- The Fed’s impossible task: cut rates and contain inflation
- How rising deficits and falling Treasury demand trap policymakers
- What happens if the 2% inflation target is already obsolete
Click below to watch now 👇
YouTube | Spotify | Apple Podcasts
BITE-SIZED COOKIES FOR THE ROAD 🍪
Investors and politicians alike are bracing for the BLS Annual Benchmark Revision today. It is expected that jobs created between March 2024 and March 2025 were much lower than previously thought, by a measure of hundreds of thousands (potentially 1 million+).
Gold continues to soar to new highs as odds of Federal Reserve rate cuts rise. The price of the yellow metal has risen nearly 40% this year.
The French Government has collapsed and the Prime Minister is expected to resign today. The chaos stems from an inability to pass a cost-cutting budget, in a further sign of the pressure on Governments across the world as public debt levels rise.
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