Mixed Signals

This morning brought a mixed report for the U.S. labor market, with the nonfarm payrolls growth coming in ahead of expectations at 139,000 — but with significant downward revisions of 30,000 and 65,000 to April and March payrolls, respectively. This supports our view that momentum in the labor market is slowing. We are also looking closely at layoffs, with a new report showing job cuts by U.S. employers reaching their highest levels since 2020. Challenger, Gray & Christmas notes 700,000 in job cuts this year in its most recent monthly report, suggesting a combination of economic uncertainty, tariffs and fragile consumer spending as drivers. Importantly, DOGE accounts for over a third of the layoffs, both directly and indirectly. We have started to see job cuts in the private sector as well, with companies like Procter & Gamble, Walmart, Microsoft, and Hewlett Packard announcing layoffs recently. We may be emerging from an era of “slow hiring, slow firing” to “slow hiring, not-so-slow firing.”  This bears watching.

The May jobs report also gives us a read on labor cost inflation, and we see wages growing 3.9% year-over year — higher than forecast. In a month where the bulk of the jobs created were in the Education and Health services and Leisure & Hospitality sectors, the upside wage pressure reflects the heavy influence of the slowdown in immigration, making hiring in those areas more difficult and costly. The upside surprise in the headline May jobs number — coupled with higher-than-anticipated wage inflation data — contributed to an immediate reaction in the bond market: Yields rose across the curve, and expectations for rate cuts eased a bit as well. With still constructive top-line jobs growth, a stable and low unemployment rate and higher-than-expected wage inflation, this is not an employment report that supports cutting interest rates.

Trade uncertainty continues to dominate headlines. While there have been notable announcements on trade talks — for example, President Trump recently raised the tariff rate on steel and aluminum to 50%, doubling the 25% rate that had been in place since March — we have seen little tangible progress toward actual trade deals, which have been stutter-step at best. Many nations have noted the difficulty in driving to a conclusion with U.S. negotiators. Talks with China appear to have hit a pause, requiring President Trump to reach out to President Xi in a 90-minute personal phone call to get things back on track. While the call appears to have been successful, with formal talks set to restart, it has done little to quell the overall anxiety around global trade policy and what the ultimate tariff rate will be.

Markets seem soothed by the premise that an average U.S. tariff rate above 20% — a worst-case scenario — is effectively off the table, but we can expect it will be far higher than the World Trade Organization’s estimate of the 2024 average tariff rate of 2.3%. Higher tariffs will likely be passed on to consumers as price increases. If companies are unable to raise prices, we are hearing that many will be considering ways to lower expenses, such as through layoffs, or by favoring the use of technology over labor going forward.  

The Congressional Budget Office has revised down its estimate of the impact of the “One Big Beautiful Bill” currently working its way through the Senate, to $2.4 trillion of deficit widening versus its original estimate of $3.8 trillion. While directionally optimistic, there is growing concern among business leaders and economists about the sustainability of the current debt and annual deficit, let alone for how the U.S. economy could handle significant increases in both. In spite of this, the financial markets have been remarkably calm.

“Bond Vigilantes” are investors who sell bonds in response to irresponsible fiscal and/or monetary policy. Aggressive selling would drive much higher interest rates and could ultimately lead to either a financial crisis or a moment of clarity for policy makers. With the 10-year Treasury yield currently sitting around 4.50%, we are far from that place: At a time when the U.S. economy is growing above trend and the unemployment rate is low, neither the bond nor the stock markets appear to be deeply concerned about the longer-term impacts of running unsustainably high deficits. Still, the volume of concern is rising, at least in the public square if not the financial markets.