Jobs weakened again, increasing the odds of an interest rate cut

The first week of September saw record highs in the stock market, but bad news on Main Street had investors rethink their investment case. The payroll report had a lot to do with that.

The non-farm payrolls report for August, released on Friday morning, was another downside surprise following last month's disappointing report. Employers added just 22,000 jobs for August, far fewer than forecast, while the headline rate of unemployment rose to 4.3%.

Economists were looking for an already subdued gain of 73,000 new jobs. Even worse, the downward revisions to the employment numbers for past months continued to show additional losses. All in all, over the last three months, the U.S economy created fewer than 8,000 new jobs—the worst record since December 2020.

Readers may recall that our president fired the head of the Bureau of Labor Statistics and replaced her with a loyalty pick after last month's data. Will he do it again? Unfortunately, changing personnel cannot conceal the obvious: job growth under Donald Trump is much less than the markets had hoped. I expect that losses will continue in the months ahead.

However, I do not expect these labor losses to herald a recession. The fundamental issue behind these numbers is immigration, or lack thereof. I have written in the past that job gains because of our immigration policies have buoyed the job market ever since the pandemic. Trump has reversed these policies at the behest of American voters. And now we must live with the results.

 The good news is that it has all but cemented expectations that the Federal Reserve Bank will cut interest rates at its September 17th meeting. It is simply a question of how much.

Given the choice between staving off further unemployment or reducing inflation, the Fed has opted for preserving jobs, at least for now. And while I continue to believe inflation will rise with the Consumer Price Index for August hitting 2.7%, 2.8% for September, and by as much as 3.1% by the end of the year, markets don't care quite yet. The latest sentiment data has an increasing chance for as many as three rate cuts in total by the end of 2025. I find that doubtful in the face of my inflation expectations.

So, what happens if I am right and the expected September rate cut turns out to be a one-and-done move by the Fed? I suspect equity markets are not going to like that one bit. Politically, President Trump will take to the airways with increased vehemence, threatening to bring fire and brimstone down on the Fed, and another uproar will ensue, and then life will go on.

But let's not get ahead of ourselves. Stephen Miran, the president's choice to replace Adriana Kugler as Fed governor, testified before the Senate Banking Committee confirmation hearing on Thursday. He passed muster and will likely take a seat on the Fed's board in the weeks ahead.

Miran testified during the hearing that he thought "Independence of monetary policy is a critical element for its success." Stocks moved higher on his words, although honestly, what did anyone expect him to say? How would "Senators, I am committed to doing whatever the president decides on interest rates during my four-month tenure on the Fed, while still working for the president," have played out before a political body already nervous over the president's move to pack the Fed with his people?

In anticipation, equities moved higher. Suddenly, the prevailing sentiment that the president was being given a bad rap for his words about the Fed changed. He really didn't intend to nominate "yes" men, after all, said the spinners. It's all about the narrative these days, isn’t it.

Moving on to "Trump's Tariff Troubles", I suggest you read yesterday's column on the subject. The Court of International Trade had announced last week that the president had exceeded his authority in using the Emergency Powers Act to levy reciprocal tariffs on our trading partners. This was after a lower court's decision weeks ago that said the same thing. Surprise, surprise,  the administration immediately petitioned the Supreme Court to reverse the decision. In any case, the tariffs will still stand until October. After that, it is anyone's guess. However, that is over a month away, and markets have their hands full simply focusing on whether the Fed will cut by 25 or 50 basis points.

I envision a scenario where investors will seek further justification next week for the Fed to cut three times this year, with the first cut expected to be 50 basis points, based on the job market numbers. Markets will be anxious awaiting the Consumer Price Index, to be announced on September 11. It should be hotter than expected. If so, based on the CPI data, three cuts "for sure"  become two "maybes." By the time the next CPI numbers (also hotter) roll around, it will be clear that inflation is rising, while job growth is slowing. That will put both investors and the Fed in a bind with no good choices.

In this environment, it is no wonder that September can be choppy, especially in the next two weeks. I advised readers to expect it, and so far, the month is living up to its reputation.

Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires.  Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI).  None of his commentary is or should be considered investment advice.  Direct your inquiries to Bill at 1-413-347-2401, email him at billiams1948@gmail.com, or visit his website at www.schmicksretiredinvestor.com. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.