Mixed Messages

The interplay between jobs data and inflation has created a complex landscape for both stock and bond markets, with investors parsing every economic release for clues about the next move from the Federal Reserve as well as from the broader economy.

For the last several years, inflation data has dominated the narrative for both stocks and bonds. However, the recent jobs data, including the very large revision of past data downward, have driven a pronounced shift. Disappointing jobs numbers are now driving expectations for interest rate cuts, overshadowing a stall in the inflation decline. The August jobs report revealed that the U.S. added only 22,000 jobs, the smallest monthly gain in several years. With unemployment climbing to 4.3% and weekly jobless claims at their highest since 2021, the message from the labor market is unmistakably one of a softening labor market and economy.

Stocks are Betting that Lower Rates Will Forestall a Recession

Stocks have been remarkably resilient. Even as inflation has become stubborn at levels well above the Federal Reserve’s 2% target, the major indexes have continued to post new all-time highs. Stock investors appear confident that the Fed is far more worried about weakness in the job market than about stubborn inflation and are betting on 2 or 3 rate cuts in the remainder of 2025 with several more to follow in 2026. The conclusion is that these cuts will cushion the economic blow and bolster corporate earnings. Technology and growth stocks, in particular, benefit from lower interest rates.

Bond Market is Defensive

Bond traders have been quick to react to the same labor market news, veering away from worries about structural fiscal deficits and a growing debt burden, driving yields sharply lower across the Treasury curve. The fall in long-term rates indicates an expectation not just of near-term Fed easing but also caution about the broader economic headwinds and a possible recession.

While the two markets are sending mixed messages — stocks pricing in optimism and bonds signaling caution — they are, in effect, responding to the same core narrative: the Fed will need to act preemptively to support growth amid persistent labor market weakness. Inflation remains a complicating factor, and a spike far above expectations could still upend this consensus. But as of now, traders appear to believe that the central bank can balance these risks by cutting rates, without jeopardizing the fragile progress on inflation.

Looking Ahead

Investors are now focused on the September 17 Fed meeting, with a 25-basis point cut viewed as all but certain and some speculation of a larger 50-basis point move. Both stock and bond markets will remain highly sensitive to incoming jobs and inflation data in the weeks ahead, as they navigate one of the more high-stakes periods for monetary policy in many years.

Have a great week!

 

What We’re Reading

 

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The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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By: Adam