Labor Reports Spar With War News

• Labor market reports for August are starting to arrive, but the high yield story continues to dominate conversations, while the Iran war shows no signs of abating. Yesterday, the US launched fresh attacks in retaliation for Iran trying to mine the Strait of Hormuz, and as a response to earlier strikes on a US base in Jordan. Peace negotiations are but a distant dream right now as both sides show little appetite to hold further discussion. Meanwhile, at the G20 meetings in Asheville, NC, Treasury Secretary Bessent said the strait will be bypassed by pipelines in two years making the waterway of little importance. In the here and now, however, the fighting has kept energy prices elevated with little on the horizon to suggest an imminent change. Bessent’s comments also didn’t mention key commodities that can’t ship via pipelines like aluminum, fertilizer, helium, etc.. Meanwhile, yields continue to inch higher, while equities continue to struggle in the current climate, touching a 30-day low. Currently, the 10yr is yielding 4.78%, down 2bp on the day, while the 2yr is yielding 4.38%, also down 2bp on the day.

 

• The ADP Employment Change report for August just posted this morning with private sector job growth at 38 thousand vs. 47 thousand expected and 46 thousand in July (adjusted from 44 thousand).  Job gains were strongest in education/healthcare at 45 thousand while leisure/hospitality added 16 thousand and 12 thousand in construction. On the other side, manufacturing lost 17 thousand and professional/business services lost 16 thousand. It’s interesting to see leisure/hospitality adding jobs after a sizeable loss in July, most likely driven by the close of the World Cup tournament. That was a major reason for the net loss of jobs in the BLS report for July, so perhaps the gain in this report signals a reversal is due on Friday.  Expectations for Friday’s BLS nonfarm payrolls report has private sector jobs at 50 thousand compared to 30 thousand in July. So, much like in the July JOLTS, the labor market continues to generate new jobs but at a modest clip.

 

• The first of the August reports arrived yesterday with the ISM Manufacturing PMI, and it revealed a sector still in expansion but with a bit less momentum than July.  The headline index ticked down to 54.6 in August vs. 55.2 expected and 55.6 in July (readings >50 indicate expansion and <50 contraction). Prices Paid was unchanged at 71.1 vs. 70.8 expected. New Orders fell to a five-month low of 53.7 vs. 56.8 expected and 56.7 in July. Employment declined to 51.2 vs. 52.5 expected and 52.8 prior month. Commentary in the release noted that, ”42% were positive and 58% negative, with a 1-to-1.4 ratio of positive to negative sentiment. In July, 38% of the comments were positive and 62% negative, with a 1-to-1.6 ratio of positive to negative sentiment. So, a slight shift towards less pessimism in the August report, but it’s still the prevailing sentiment. Pricing volatility was mentioned in 57% of the negative comments, the Iran war 30%, increasing lead times 46% and tariffs 29%. In all, still a positive reveal for the manufacturing sector, but higher prices persist and while employment slowed from July it remained in expansion territory.

 

• Another report from yesterday was the July Job Openings and Labor Market Survey (JOLTS). Job Openings were 7.27 million vs. 7.31 million expected, and 7.18 million in June, (revised down from 7.36 million). This brings the job/jobless ratio up to 1.05 from 1.01 prior, the highest since January 2025. The Quits Rate (those voluntarily leaving) dipped from 2.0% (quits to total employed) to 1.9% while expectations were for an unchanged 2.0%. The Quits Rate is thought to be a measure of worker confidence in finding alternative/better employment. A higher rate implies more confidence. Prior to Covid it typically was in the 2.0% area, fell during Covid and has recently been back to the 2.0% range (see graph below). The Layoffs Rate declined to 1.0% (Layoffs to Total Employed) vs. 1.1% projected/prior. This agrees with the low weekly initial unemployment claims that have also indicated layoffs remain low. Meanwhile, the Hiring Rate declined to a five-month low at 3.2% from 3.4% in June. So, only slight to modest shifts in labor market internals but nothing to indicate much strengthening either. That agrees with other labor market reports of late and keeps the theme of labor market stability in place but also lacking spark too.

 

• As yields approach levels that have held, in some cases, for 20 years, equities are coming under increasing stress. And while the selling can be called merely a consolidation to this point, with the war showing little signs of abating, a thought occurs that the selling can easily continue, and if it does, attention shifts to the consumer, especially the equity-holding consumer. We saw signs of spending slowing in both the July Retail Sales and Personal Income and Spending Reports. Further stress in equities amidst higher rates will no doubt pressure the consumer more in the near term. Meanwhile, the labor market appears stable, no doubt aided by the auto-pilot-like spending on data centers and other AI-related demand, not to mention healthcare job gains that are more dependent on boomer demographics than economic cycles. The appearance of labor market stability opens the door to a September rate hike and with energy prices heading higher that becomes a distinct possibility.

 

• If the Fed does hike in September, how many more will follow? If we look out to futures in March 2027, odds are about 63% that there are two or three hikes by that time and 9% odds of four or more hikes. Later meetings see little change in those odds, so three hikes from here puts the Fed Funds rate at 4.25% – 4.50%. That’s well above the current median neutral rate estimate of 3.06%. It should be noted, however, there is quite the divergence by Fed members in where they think the neutral rate currently exists, with the highest estimate at 3.875%. Even at that high neutral rate, a three-hike move would put funds clearly in restrictive territory, and at the median neutral rate more than 100 – 125bp in restrictive territory. With a labor market already experiencing slowing momentum, albeit still showing modest job growth, the combination of higher rates and struggling equities will likely slow economic growth to near stall speed. Thus, despite the uncertainty of the moment, 5-handle yields available today appear to be levels that won’t be breached by Fed Funds in the tightening cycle yet to come.

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Don’t Look Now but More Energy Price Pressure Headed Our WaySource: Bloomberg

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August ADP Employment Change – 38 thousand Private Sector Jobs vs. 46 thousand in JulySource: ADP

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August ISM Manufacturing – Slight Downshift but Still ExpandingSource: ISM

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July JOLTS – Job Openings Dip but Remain Above Total Unemployed