Labor market weakness highlights Fed’s next challenge
The past week brought significant developments across the economy and financial markets. From a surprisingly weak jobs report to sharp moves in technology stocks and anticipation surrounding next week’s inflation data, investors have much to consider as we head into mid-September.
Labor Market Shows Signs of Strain
Chief Investment Officer Thierry Hasse
The monthly Employment Situation Report from the Bureau of Labor Statistics (BLS), released Friday, Sept. 5, raised concerns about the health of the labor market. For many Americans, a strong economy is synonymous with a strong labor market, one that offers plentiful opportunities for full-time employment. Unfortunately, last week’s data pointed to growing cracks in that foundation:
- The unemployment rate ticked up to 4.3%, its highest level since 2021.
- Nonfarm payrolls rose by only 22,000 in August, well below July’s revised figure of 79,000.
- Historical revisions revealed that employment declined in June, marking the first contraction since 2020, during the early months of the COVID-19 pandemic.
- Job growth was concentrated in healthcare and hospitality, while most other sectors saw outright declines.
- Manufacturing employment fell by 12,000 in August and is down 78,000 year-to-date, a troubling trend given the tariffs intended to encourage domestic production.
This weaker-than-expected report pushed bond yields lower, with two-year Treasury yields falling to their lowest level since 2022, when the Federal Reserve began raising rates to combat inflation (Source: CNBC). The sharp drop in yields suggests markets are now almost fully pricing in a rate cut at the upcoming Federal Open Market Committee (FOMC) meeting on Sept. 17.
While a rate cut may help support growth, the risk remains that continued labor market deterioration could tip the economy into recession. With U.S. equities hovering near record highs, investors are hoping that lower rates will cushion the slowdown rather than signal a deeper downturn ahead.
Tech Sector Surges Despite Weak Finish
Despite Friday’s broader market weakness, U.S. technology stocks had an exceptional week, underscoring the long-term value of high-quality companies. The standout performer was Alphabet (Google), which surged more than 10% following a favorable ruling in the remedies phase of its antitrust case with the Department of Justice.
Earlier this year, concerns mounted that Google’s artificial intelligence initiatives, such as Gemini, were falling behind competitors like OpenAI. Some investors even speculated that Google might follow the path of Eastman Kodak, which invented digital photography but failed to capitalize on it, ultimately leading to the company’s decline and bankruptcy.
Those fears were alleviated on Wednesday when the court’s decision confirmed that Google would not be required to sell its Chrome browser. Alphabet shares jumped 9% in a single day and closed the week at $235, a record high and 63% above April’s lows (Source: CNBC). Google remains a core holding in Elevage Partners’ Focused Equity portfolio.
Inflation Data in Focus
With labor market weakness now evident, inflation is the final hurdle for the Federal Reserve as it considers resuming a more accommodative stance. As the Wall Street Journal recently noted: “By early next year, the Fed will have spent five years with inflation running above its goal.”
The Fed’s long-term inflation target is 2%, a level it has struggled to maintain since the pandemic. While fiscal stimulus and massive spending bills during the COVID-19 era contributed to the inflation spike, many critics argue the
Federal Reserve also mismanaged monetary policy:
- Initially failing to control money supply growth, which exceeded sustainable levels.
- Dismissing the 2022 spike to 9% inflation as merely “transitory.”
- Adopting a reactive, data-dependent approach, focusing on lagging indicators like the unemployment rate rather than following a consistent, rule-based framework.
As economist Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon”, i.e., too much money chasing too few goods. This principle underscores the challenge facing the Fed as it attempts to balance economic support with price stability.
Tariffs and the CPI: What to Watch This Week
The next major data point arrives with Tuesday’s release of the Consumer Price Index (CPI), which will provide insight into how recent tariff increases are flowing through to consumer prices.
Headline CPI is expected to show a 2.9% year-over-year increase, up slightly from July.
Core CPI, which excludes volatile food and energy components, is projected to rise 3.1%, unchanged from July’s pace (Source: Barron’s).
These figures will be closely watched by both policymakers and investors, as they may influence the Fed’s September decision and set the tone for the remainder of the year.
Looking Ahead: A Pivotal Week for Markets
The coming week represents a critical juncture for financial markets. The interplay between labor market weakness, inflation trends and monetary policy decisions will shape the path forward.
At Elevage Partners, we’ll be monitoring these developments closely, with a focus on helping our clients stay prepared and confident amid uncertainty.
And, as we’ve learned, sometimes the best insight isn’t a prediction. Rather, it’s patience.
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