Slower job growth likely solidifies September rate cut

 
The US jobs report for non-farm payrolls was “must-see TV” last week. While employment data can shift expectations for economic growth, inflation, policy rates, and stock valuations, this report had heightened significance because markets are awaiting what the Federal Reserve (Fed) will do regarding monetary policy. It also had added weight because of concerns about the politicization of the data. Had the data exceeded expectations, skepticism about its credibility might have dominated the narrative. Instead, the report showed a slowdown in job creation, consistent with the ADP private payroll data.

Jobs data support a September rate cut

While the September 5 report showed job growth had slowed, it doesn’t appear to be signaling a recession. Demand for workers has eased, but layoffs remained limited.² Labor supply has also declined due to retirements and reduced immigration.³ With the slower job growth in the September 5 report, it appears that the Fed is now all but guaranteed to cut rates on September 17. A 25-basis point (bps) cut is fully priced by the market,⁴ and we’d not be surprised to see some Federal Open Market Committee (FOMC) members, such as Christopher Waller and Michelle Bowman, vote for a 50-bps cut. But we don’t think that’s warranted at this stage. The report showed that just 22,000 jobs were created in August, and the June and July figures were revised lower by a cumulative 21,000. The unemployment rate climbed to 4.3%, broadly in line with consensus forecasts. Average weekly hours worked also fell, which can be taken as a further signal that employers need their staff to do less work.⁵

Good news for markets?

When inflation is elevated⁶ weaker job growth can be interpreted as good news for markets. It can mean that the economy isn’t overheating and that a sustained period of inflation is unlikely. It can also suggest that multiple rate cuts may be on the horizon. Lower yields across the Treasury curve can support stock valuations. Slower growth, anchored inflation expectations, falling yields, and anticipated rate cuts point to an optimistic outlook for stocks. 

Long bond sell-off isn’t a reason for panic

Interest rates rallied across the U.S. Treasury yield curve on Friday, following the weaker-than-expected jobs report that shifted investor focus toward signs of economic softness. This marked a notable reversal from earlier in the week, when concerns were mounting over the rise in 30-year US Treasury yields. The initial selloff was driven by a mix of inflation worries, questions about the Fed’s independence, and growing unease over US fiscal sustainability. By week's end, however, those concerns had eased, and attention turned to the weakening economic data, sending the 30-year yield plunging below 4.8%.⁷

The US wasn’t alone in experiencing upward pressure on long-term rates — France, the UK, Japan, and others also saw similar moves. In both the UK and France, the rise in yields reflects increasingly complex political environments, where policymakers may need to adjust course to address widening fiscal deficits. Despite these challenges, stock markets in the UK and France have performed well this year, supported by their structural overweight to banks and industrials, the steepening of their yield curves, and optimism surrounding European fiscal spending initiatives. 

Gold rush

Driven by concerns around fiscal sustainability and central bank independence, as well as expectations for Fed rate cuts, gold experienced a meaningful rally in recent weeks. Since mid-August, the precious metal has surged more than 8% on the back of a rise in long-end sovereign bond yields, the attempted firing of Fed Governor Lisa Cook by the White House, and hints of a potential policy pivot from Fed Chair Jerome Powell at the Jackson Hole Symposium.⁸ Gold has now notched three consecutive weeks of gains — its longest win streak in six months — pushing prices to record highs approaching $3,600 per troy ounce.⁹

Despite already posting double-digit returns in both 2023 and 2024, gold is up nearly 35% year-to-date,¹⁰ and the fundamental drivers behind its performance remain firmly in place, in our opinion. These include: 

• Persistent central bank buying, which has shown no signs of letting up. 
• Investor demand for hedges against fiscal and geopolitical uncertainty. 
• The prospects for lower interest rates may diminish the relative appeal of holding cash.
  

Notably, the broader investment community finally appears to be participating in gold’s rally. After years of tepid interest and weak flows, gold ETFs have seen a remarkable rebound in demand this year.¹¹ Gold mining stocks have also attracted greater investor attention, underscored by the NYSE Arca Gold Miners Index’s 97% year-to-date return.¹²

The rapid rise in gold prices and renewed interest in gold funds could prove self-reinforcing. Greater investor demand can push up the price, which in turn attracts more investor attention. With momentum building and fundamental drivers still in place, the gold rush may have only just begun, in our view.